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."