Also on Monday, Citigroup announced plans to acquire Wachovia's banking operations for $1 per share, a deal encouraged by Timothy Geithner '83, president of the Federal Reserve Bank of New York.
The Nasdaq Composite Index dropped by more than 9 percent, and the Standard & Poor's 500-stock index fell more than 8.5 percent.
The bailout, supported by President George W. Bush and congressional leaders across the aisle, was defeated 228 to 205 votes, with a majority of Republicans voting against the bill and a majority of Democrats supporting it.
"The members of Congress who voted against the bill do not appreciate the degree to which the financial crisis will spill over," John Gilbertson '79, a managing director at Goldman Sachs, said in an interview with The Dartmouth. "They see this as a rescue for Wall Street, but they don't see the connection from the financial market back to the real economy."
Advocates of the bailout said they were going to review the bill and try to raise it to a vote again as soon as possible, according to The New York Times.
"The stock market is telling Congress something," Gilbertson said. "I think there's a pretty good chance that something will get done, but it could go either way."
In order for the vote to pass in a second round, something would need to occur to change minds in Congress, according to Dartmouth economics professor Andrew Samwick, director of the Rockefeller Center. In the meantime, the government will have to continue addressing issues as they arise, Samwick said.
"The government is now going to have to go more on a case-by-case basis when helping financial institutions," Samwick said, adding that he was surprised that the bill did not pass. "All this means is that they're not going to do it in one big movement right now."
Samwick pointed to the decision not to bail out the now-bankrupt Lehman Brothers and the government role in the Citigroup-Wachovia deal as examples of the U.S. handling the crisis on a "case-by-case" basis.
"Today was a bad turn by Congress down the wrong road, and worse yet, it was unexpected," Gilbertson said. "It was a very cold shower to hear that the House hadn't passed it."
Although Bush supported the bailout, there is little loyalty to the president among Republican congressmen, which Gilbertson said is one reason most voted against the bill.
Republicans also opposed the bill because they are aiming to please their constituents, many of whom believe that the bill is just a fix for Wall Street and will not affect them, Gilbertson said.
"Right now, they're worried about re-election," Gilbertson said. "The many Republican members of the House are afraid of being criticized by their constituents."
Gilbertson said that the negative implications of the bailout failure would not emerge until after the November elections.
Because the vote is another event in a long line of crises, employees in Gilbertson's Chicago office were not overly worried, he said.
"It was resignation and disappointment," Gilbertson said. "Two weeks ago, some people felt a deeper concern when Lehman Brothers went bankrupt because they were struggling to understand. Now we're in a situation that's more volatile, but people can see problem-solving at work. They see it's going to be a rocky road, but this too shall pass."
It is uncertain how soon the economic crisis will pass, though, Samwick and Gilbertson said. Both said they believe the economy will not regain stability for at least two years.
