NEW YORK (Reuters) - Major U.S. stock indexes dropped the most in two decades on Monday after U.S. lawmakers rejected a $700 billion bailout plan and major U.S. and European banks made emergency deals to survive, making investors flee to gold, government debt and the low-risk yen.
The Dow fell more than 770 points, its biggest single-day decline on record. Spot gold prices jumped more than 4 percent and crude oil prices fell almost 10 percent after the U.S. House of Representatives voted down the bailout bill.
The broad Standard & Poor's 500 Index .SPX fell 8.77 percent, its biggest one-day decline in percentage terms since Black Monday in October 1987 when it plummeted 22 percent.
World stocks, as measured by MSCI’s all country world index, lost about $1.7 trillion for the day.
The failed proposal would have authorized the U.S. Treasury to spend up to $700 billion to buy illiquid assets from banks.
The bill was defeated by skeptics from both parties who questioned the need for it and whether it would work to jump-start stalled capital markets around the world.
“What should have been a day of hope turned into a day of desperation,” said Marco Annunziato, chief economist at UniCredit in London. “We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown.”
President George W. Bush and Treasury Secretary Henry Paulson said the administration would work to develop a strategy to rescue the financial system.
The Dow Jones industrial average .DJI closed down 777.68 points, or 6.98 percent, at 10,365.45. The Standard & Poor's 500 Index .SPX shed 106.59 points, or 8.79 percent, to 1,106.42. The Nasdaq Composite Index .IXIC lost 199.61 points, or 9.14 percent, to 1,983.73.
The congressional vote, designed to stabilize skittish financial markets around the world, stunned investors who wondered what would come next.
“We are in a situation where the market is looking around and saying what else can the government throw at us, and it is not much else right now,” said Rudy Narvas, senior analyst at 4cast Ltd in New York.
Before the vote, the euro and British pound tumbled against the dollar and crude oil prices dropped nearly 8 percent to below $99 a barrel on signs the crisis was spreading beyond the United States to Europe and cut energy demand worldwide.
U.S. and euro-zone government debt soared in one of the biggest rallies for fixed-income securities this year as fears of spreading bank failures overshadowed moves by central banks to pump hundreds of billions of dollars into frozen markets.
Aversion to risk boosted the low-yielding Japanese yen as investors flocked to safe-havens.
In Europe, the leading index of European shares fell more than 5 percent to a three-and-a-half year closing low, while many indexes elsewhere, especially in emerging markets, tumbled harder.
“Investors are fearful, frenetic, especially when it comes to banking shares. They want to get out now and see the after-effects from afar,” said Frank Geilfuss, head analyst at Bankhaus Loebbecke.
European authorities were forced over the weekend to rescue a slew of European banks, while U.S. regional bank Wachovia Corp WB.N sold most of its assets to Citigroup (C.N) in a deal brokered by the Federal Deposit Insurance Corp.
Global money markets remained frozen even as central banks, including the Federal Reserve, continued to pump liquidity into world markets. Major central banks also announced a $330 billion increase in an arrangement among themselves to make more dollars available to the markets.
“We started Monday with more fear than when we left on Friday,” said Eric Kuby, chief investment officer of North Star Investment Management Corp in Chicago.
Signs of the potential impact of the financial crisis could be seen in the stock of Apple Inc (AAPL.O), whose shares closed down almost 18 percent on concerns the maker of the iPod and iPhone will suffer as economic growth slows.
In Europe, the British government took over troubled mortgage lender Bradford & Bingley BB.L and three European governments partially nationalized banking and insurance group Fortis FOR.BRFOR.AS. Germany’s government threw a lifeline to cash-strapped lender Hypo Real Estate HRXG.DE.
The FTSEurofirst 300 index .FTEU3 of leading European shares ended down 5.23 percent at 1,047.04 points -- its lowest close since January 2005 -- and off 27 percent this year.
In government bond markets, the benchmark 10-year U.S. Treasury note rose 63/32 to yield 3.62 percent, and the 2-year U.S. Treasury note rose 23/32 to yield 1.71 percent. European government bonds surged, pushing the two-year yield to a five-month low.
The euro fell 1.16 percent to $1.4444, and against the yen, the dollar fell 1.73 percent at 104.14. The dollar rose against a basket of major currencies, with the U.S. Dollar Index .DXY up 0.42 percent at 77.609.
MSCI’s all country world equity index .MIWD00000PUS plunged 6.7 percent, its biggest single-day loss in at least 20 years. MSCI’s emerging markets stock index .MSCIEF dropped 6.26 percent, its biggest drop on record.
U.S. November crude settled down $10.52 to $96.37 a barrel, after touching a session low of $95.04, in the second biggest drop since April 2003. November crude dropped 11.8 percent last Tuesday following a spike involving the expiry of the October crude contract.
December gold futures settled up $5.90 at $894.40 an ounce in New York. Spot gold rose $38.85, or 4.42 percent, to $917.25.
Reporting by Kristina Cooke, John Parry, Nick Olivari, Christopher Kaufman and Fank Tang in New York and Naomi Tajitsu, Jane Merriman and Alex Lawler in London and Sarah Marsh in Frankfurt; Writing by Herbert Lash; Editing by Chizu Nomiyama