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After opening sharply lower, the Russell 2000 has fallen to a low on the session, as lawmakers continue to haggle about a bailout plan that was once almost a done deal, and after Washington Mutual, one of the nation’s largest thrifts, failed.

At 12:22 p.m. ET the Russell 2000 (NYSE:IWM) had sunken 13.62, or 1.93%, to 692.14.

Negotiations over the $700 billion bailout plan continue on Capitol Hill after what appeared to be a strong compromise unraveled after a meeting at the White House with Congressional leaders and Presidential candidate hopefuls. The compromise was put on hold Thursday night after the House Republicans presented an alternative plan that would allow banks to purchase insurance for toxic mortgages instead of relying on taxpayer money.

This morning; however, House Republicans sent Roy Blunt (R. Mo.), the second top Republican in the House, to resume negotiations on President Bush’s $700 billion bailout plan. Also, in an effort to ease markets, both parties made statements aimed at conveying that both sides are interested in regaining a consensus to pass a plan. President Bush said this morning, “We are going to get a package passed;” while democratic Senators Harry Reid (D., Nev.) and Chris Dodd (D., Conn.) echoed what Bush said. Senator Reid says he perceives a deal can be completed before Monday and that Congress will remain in session until a consensus is reached and a plan is passed.

In a reality check for Washington, federal regulators seized Washington Mutual (NYSE:WM) on Thursday after it became evident to the Federal Deposit Insurance Corp. that there had been such a large run on deposits that the bank no longer had sufficient liquidity to continue operating. WaMu’s collapse marks the biggest bank failure in U.S. history. After taking over the bank, regulators struck a deal with J.P Morgan (NYSE:JPM) to sell the majority of WaMu’s operations to the bank for $1.9 billion. As a result of the deal, JP Morgan supersedes Bank of America as the largest bank in the nation as measured by deposits. The fact that no banks were willing to purchase WaMu until it failed is a sign of the market’s low confidence in the system and is all the more reason for Washington to quickly pass a bailout plan to restore confidence. 

Fears that the bailout plan is stalling, saw continued angst in the credit markets. The spreads between 3-month Libor to 3-month Overnight Index Swap are higher and continue to point to a complete collapse of lending between banks. Short-term money markets continue to be enveloped in disarray. Yields on the one-month and six-month treasures are higher this afternoon, while yields on the two-year and ten-year treasuries are lower, as investors buy up longer-term bonds. Still, on a relative basis bond yields are markedly lower, as investors seek a safe haven for their cash. ...

After a green day on Thursday, small caps opened lower on Friday, after it became evident that lawmakers could not come to an agreement on the $700 billion bailout plan and after Washington Mutual (NYSE:WM), one of the nation’s largest thrifts, failed.

At 10:07 a.m. ET the Russell 2000 (NYSE:IWM) was down 10.20, or 1.45%, to 695.54.

Federal regulators seized Washington Mutual on Thursday after it became evident to the Federal Deposit Insurance Corp. that there had been such a large run on deposits that the bank no longer had sufficient liquidity to continue operating. WaMu’s failure marks the biggest bank failure in U.S. history. After taking over the bank, regulators struck a deal with J.P Morgan (NYSE:JPM) to sell the majority of WaMu’s operations to the bank for $1.9 billion. As a result of the deal, JP Morgan supersedes Bank of America as the largest bank in the nation as measured by deposits. The fact that no banks were willing to purchase WaMu until it failed is a sign of the market’s low confidence in the system and is all the more reason for a bailout plan to pass to restore confidence.

Negotiations over the $700 billion bailout plan continue on Capitol Hill after what appeared to be a strong compromise unraveled after a meeting at the White House with Congressional leaders and Presidential candidate hopefuls. The compromise was put on hold after the House Republicans presented an alternative plan that would allow banks to purchase insurance for toxic mortgages instead of relying on taxpayer money. President Bush made a statement this morning to try to reunite Congress behind the plan. The President said, “We are going to get a package passed.”

Fears that the bailout plan is stalling, saw angst continue to overtake the credit markets. The spreads between three-month Libor to three-month Overnight Index Swap are higher and continue to point to a complete collapse of lending between banks. Short-term money markets continue to be enveloped in disarray. Yields on the one-month to six-month treasures are surprisingly higher this morning and remain in positive territory, while yields on the two-year and ten-year treasuries . . .