Morning Brief: Time to bail out the bailout?

Special announcement: Foreign Policy has been acquired by the Washington Post Company.

Top Story

SAUL LOEB/AFP/Getty Images

A bipartisan, $700 billion rescue plan for the U.S. financial sector went down in flames yesterday in the House of Representatives, sending markets into a tailspin not seen since Black Monday in 1987.

The bill, despite intense lobbying by President George W. Bush and Treasury Secretary Henry Paulson, lost on a 228-205 vote as rank-and-file members in each party — primarily Republicans — broke with their leadership to oppose it on ideological grounds.

The GOP ripped Speaker Nancy Pelosi for delivering a partisan speech on the House floor, but Democrats blamed Minority Leader John Boehner for failing to deliver enough votes. “You can’t break their arms, you can’t put your whole relationship on the line with them and ask them to do something they do not want to do and have that member regret that vote for the rest of their life,” pleaded Boehner, who earlier called the rescue plan a “crap sandwich.”

World markets blanched at the bill’s failure. The Dow Jones industrial average lost nearly 778 points or 7 percent, wiping out some $1.2 trillion in shareholder value. The S&P 500 also fell, by 8.8 percent. But investors in Europe and Asia seemed to have a more mixed view.

“The market’s disappointed — shocked even — by what happened in Washington, but there’s still an expectation that a deal will be done,” explained one British analyst. “This is much too important to simply let fail,” an exhausted-looking Secretary Paulson stressed. But it won’t be before Thursday — Congress is on hiatus for Rosh Hashanah.

President Bush is due to speak at 8:45 a.m. ET today on the impasse.

Decision ’08

John McCain accused Democrats of injecting partisanship into the bailout debate; Barack Obama called for calm and urged the bill’s passage.

Obama called today for lifting the ceiling on FDIC-insured deposits to $250,000.

Howard Kurtz reports that CBS is sitting on two more embarrassing clips from Alaska Gov. Sarah Palin’s interview with anchorwoman Katie Couric.

Americas

U.S. Defense Secretary Robert Gates criticized the Pentagon for favoring large, expensive weapons systems over more flexible platforms.

Authorities in Tijuana, Mexico, have found 16 bodies in 24 hours in what looks like drug-related violence.

Brazil’s Environment Ministry named the government the country’s worst illegal logger of the Amazon rainforest.

Asia

In a rare message, Taliban leader Mullah Mohammed Omar called on U.S. troops to withdraw from Afghanistan.

Pakistan named a new intelligence chief, Lt. Gen. Ahmed Shuja Pasha. Dawn has more.

At least 168 people have died in a stampede at a Hindu temple in western India.

China’s milk recall is affecting Western brands, such as Cadbury.

Middle East and Africa

Syria’s foreign minister says he met with U.S. Secretary of State Condoleezza Rice last week in New York in a sign of improving relations.

Israel must leave the West Bank, outgoing Israeli PM Ehud Olmert says. Haaretz: too little, too late.

Iraq moved to allow doctors to carry guns for protection.

U.S. warships have surrounded an armed-to-the-teeth freighter that was captured by Somali pirates. The pirates seem to be fighting each other.

Europe and the Caucasus

An MI6 camera containing surveillance information on al Qaeda members was lost and put up for sale on eBay.

The British economy grew by 0 (zero) percent in the second quarter.

Ireland moved to guarantee deposits at six banks.

Today’s Agenda

Hedge funds are bracing for a wave of withdrawals today.

U.S. envoy Christopher Hill is visiting Seoul, where he hopes to breathe life into the nuclear talks with North Korea.

John McCain is in Iowa and Barack Obama is campaigning in Nevada. Neither Joe Biden nor Sarah Palin, who are preparing for Thursday’s vice presidential debate, has any public events.