Small caps plunge 5% on failure of bailout bill

Small caps have plunged late afternoon after the bailout bill failed to pass in the House overshadowing the Federal Deposit Insurance Corp.’s brokered deal for Citigroup (NYSE:C) to purchase Wachovia’s (NYSE:WB) banking operations.

At 2:07 p.m. ET the Russell 2000 (NYSE:IWM) was down 5%, or 36, to 668. 

The House of Representatives failed to pass the $700 bailout bill, shocking markets and sending the S&P to its lowest level since 1997. After the bill failed, a motion was made for reconsideration of the bill; however attempts to revive it failed. Uncertainty looms around what comes next.

"Right now the market is extremely disappointed,” Andy Busch, global foreign exchange strategist of BMO Capital Markets, said. “It’s a huge embarrassment to both the Democratic and Republican leadership in the U.S. House. This bill shouldn’t have been brought to the floor if they couldn’t have passed it in its current form. I firmly believe that this was the gun to everyone’s head that they needed to see what was out there for the people who voted against it. I believe they will bring back this bill in another form and vote on it again. It’s dead for now…but I think it’s pretty clear they want to get something done because of the disastrous affect it’s had.”

In an attempt to battle the burgeoning credit crisis globally, the Federal Reserve along with the central banks of other countries said they will work together to inject cash into the global financial system to provide relief for debilitated banks. The U.S. central bank has also received authority to pay interest on reserves held by the Fed.

“This should encourage banks to leave funds at the bank while they receive 2%,” Busch said in an email. “This will allow the Fed to expand its balance sheet without forcing Fed Funds to zero. This means they can potentially pump up the liquidity by massive amounts to assist with the credit crunch.”

In the latest chapter of the credit crisis, Citigroup will act as Wachovia’s white knight under the direction of the FDIC and acquire its banking operations. Under the terms of the deal, Citigroup will assume $42 billion in losses and provide the FDIC with $12 billion in preferred stock and warrants, while the FDIC will absorb the remaining losses. The deal also contains a provision that protects Wachovia debtholders. To finance the deal, Citigroup said it will offer $10 billion in stock and cut its quarterly dividend by half to $0.16 per share. The sale follows the Charlotte, N.C.-based bank’s . . .

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