INSTANT VIEW: House of Representatives rejects bailout

NEW YORK (Reuters) - The House of Representatives on Monday rejected the Bush administration's proposed $700 billion rescue package for the financial sector, triggering a massive sell off in stocks and a rush into safe-haven government bonds.

KEY POINTS:

* With a majority of Republicans voting against, the House voted 228 to 205 to reject the measure.

* The Dow Jones industrial average was down by more than 700 points at one point.

* Democratic leaders in the House said they would need to reassess the economic reaction before making any decisions.

* U.S. 30 year Treasury bonds rose a full 4 points in price.

COMMENTS:

BNP PARIBAS CREDIT STRATEGY TEAM IN LONDON (VIA EMAIL NOTE):

"Is this the end for financial markets? MOST CERTAINLY NOT. This was not an optimum solution and the market simply rejected it.

"There is always plan B, a bit bitter to swallow but nevertheless a very workable solution that has historical precedence. The plan we are advocating is very similar to an explicit good-bad bank solution whereby the banks get rid of bad assets in an SPV at market prices, however low they may be and if they find themselves undercapitalized as a result of this act, they suspend dividends and sell equity to the US Treasury and/or the Fed. Dilution of equity holders is a must for undercapitalized banks and there is no getting away from it - a serious flaw in the Paulson plan.

"We strongly believe, recapitalization of banks and not reliquidification of banks lies at the core of getting credit markets going. Trust and liquidity will return when capital is adequate. The banks who feel vulnerable should not wait for a fiscal solution but should proactively work with the Fed, Treasury and private investors to get recapitalized.

"We also believe that as a consequence of this No vote, the USD will actually strengthen as US financials will be forced into an accelerated deleveraging mode and assets sold abroad will lead to repatriation of USD. Due to this, it is also very likely that commodity prices will also come down and assist in consumer confidence. Not all is gloom and doom. A long term positive will also be the US consumer beginning to save as credit gets scarce and is rationed at a high price. This is all part of the gradual healing process.

"As for systemic risk, in the very near term, we expect it to remain very high till weak entities start implementing a recapitalization program or are driven to merge with stronger entities or driven into bankruptcy. The system needs to delever before it recovers. Once the systemic risk subsides, we expect the stress to be felt by the real economy with downgrades and defaults accelerating within non-financials.

"If capitalism has to survive, the NO vote has only ensured that it will."

HAAG SHERMAN, CO-FOUNDER AND MANAGING DIRECTOR, SALIENT PARTNERS, HOUSTON:

"The markets are reacting logically. There's panic and a lot of fear."

"I think our country's balance sheet looks like that of a third world country and our government looks like that of a third world country."

"This has exacerbated that crisis of confidence of investors that the government is going to step in and do what is necessary to unfreeze the credit markets."

BOB DOLL, GLOBAL CHIEF INVESTMENT OFFICER OF EQUITIES AT MONEY MANAGER BLACKROCK INC.:

"I am shocked. Credit markets were struggling even with the prospect of this bill was going to get passed. Now the bill doesn't get passed and it just throws one more uncertainty monkey wrench into the mix. So it's just uncertainty breeds higher required rates of return, which is not good for markets. The bill was not the 'be all, end all.' But it is the one that we thought was going to be a part of what was going to happen. I viewed the bill all along as a necessary evil that would reduce significantly the risk of the big black hole scenario -- credit markets struggling and not functioning. So they now have to go back to the drawing board. In the meantime, if we need it I am sure global coordinated central bank rate cuts could be in the cards."

SCOTT MACDONALD, DIRECTOR OF RESEARCH, ALADDIN CAPITAL, STAMFORD, CONNECTICUT:

"I think anybody looking at this market has to put any judgments on anything on hold until there is a clear indicator as to what's going to come back out of Washington."

"This is a real moving target, and its become very politicized and there's a big X factor over how do you value anything in this market."

"The U.S. economy is like a car, the engine is like the financial system, if you don't have liquidity pumped into the engine, it eventually comes to a juttering halt."

"The idea of a market solution has been moved away and we've really looked at a political solution by putting it into congress. In an election year, there's a strong desire to make the fat cats pay."

"What most people on Main Street don't understand is the very strong nature of interconnectiveness that comes from where they put their savings, who manages their pension funds, what is in their pension funds, and access to credit, be it for auto loans, mortgages or small business. Sadly the desire to punish the fat cats can include a lot of self-inflicted wounds."

MOHAMED EL-ERIAN, CHIEF EXECUTIVE OFFICER, PACIFIC INVESTMENT MANAGEMENT CO, NEWPORT BEACH, CALIF.:

"Failure to pass the stabilization bill has heightened concerns among global markets on the ability of policy makers to offset the increasingly vicious financial deleveraging dynamics that threaten global economic growth, employment and trade. The credit markets were already in a highly disrupted mode. The rejection of the stabilization plan will not help. The bill, along with timely reactions by central banks around the world, is needed to "crowd in" the private funds that would help recapitalize the financial sector."

MICHAEL SHELDON, CHIEF MARKET STRATEGIST, RDM FINANCIAL, WESTPORT, CONNECTICUT:

"There is clearly a sense of disappointment. As an investor you have to scratch your head and wonder what comes next. If we don't get some sort of relief to help financial institutions and the illiquid securities they hold on their balance sheet, it's going to be difficult to see the economy really improve over the near term.

I guess the best case scenario is that members of Congress reconvene and come up with a different plan, that they can agree.

The VIX volatility has spiked above 50 this afternoon, which is a huge move which indicates a tremendous amount of stress and anxiety in financial markets.

There is a real sense of uncertainty and a question as to what steps could come next and bring about some stability. Given the failure of Congress to act today there looks like there would certainly be more downside in the economy and consequently the stock market.

One small positive is that the stock market typically bottoms before the economy -- however given there is so much uncertainty right now it is hard to say when the bottom in the economy could be."