In a move that will reverberate from Wall Street to Main Street, the U.S. House of Representatives yesterday (Monday) voted to reject a compromise $700 billion banking-bailout bill, an act of stunning defiance that eradicated $1.2 trillion in shareholder wealth as U.S. stocks endured their biggest one-day point loss in history.

The blue-chip Dow Jones Industrial Average Index plunged 777.68 points, or 6.98%, to close at 10,365.45. The tech-laden Nasdaq Composite Index plummeted 199.61 points, or 9.14%, to close at 1,983.73. And the broader Standard & Poor’s 500 Index plunged 106.59 points, or 8.79%, to finish the day at 1,106.42.

All sectors were gutted, but energy and financials were among the hardest hit, plummeting 11.02% and 10.55%, respectively.

“My outrage over this just continues to grow,” Money Morning Investment Director Keith Fitz-Gerald said in an interview late yesterday. “This just didn’t have to happen.”

Financial markets worldwide had slumped even before the House voting began; Hong Kong’s blue-chip Hang Seng Index plunged 4.3%, while the Paris-based CAC40, London’s FTSE 100 and in Paris and London they were down 3 percent. Hong Kong’s blue-chip Hang Seng Index plunged 4.3%, nose-diving 801.41 points to close at 17,880.70.

There may have been some optimism – reflected by the close of markets on Friday – that that whatever deal might come out of the Congressional-compromise efforts being hammered out over the weekend would be better than what had previously been on the table, said R. Shah Gilani, a former hedge fund manager who is now a Money Morning contributing editor, and who last week crafted an alternate bailout plan that he presented to readers of this global investment news service. Then, when markets overseas saw what was actually forthcoming, the markets in Asia and Europe sold off as a way of effectively voting “No” to the bailout plan. When the U.S. markets fell at the open, it was as if investors were telegraphing that the deal was doomed, Gilani said.

“What the markets reflected was a ‘no-confidence’ vote in the rescue plan – period,” Gilani said. “When the House [of Representatives] vote finally came in, the resulting deeper drop evidenced despair in the continuing politicization and shotgun to specific problems that, for all clear minds, can readily be neutralized by targeted action. Either way, this was never going to be a positive day for the markets.”

“It’s pretty much a nightmare,” Michael Nasto, the senior trader at U.S. Global Investors Inc. (GROW), told Bloomberg News. “This is the worst we’ve seen it since the credit mess started. Until we know exactly why they didn’t pass it, we’re going to be selling off for a while.”

The CBOE Volatility Index, or VIX index, hit a record high of 46.72 yesterday. The VIX is a measure of “investor sentiment and market volatility.” Using real time options prices, it is often used as a measure of fear in the market. The higher the VIX goes, the more fear in the market as investors utilize options to hedge positions.

Given the panic unfolding on Wall Street yesterday, a high VIX reading doesn’t seem that surprising. But what is surprising is that historically, the S&P 500 Index has performed well after such high fear-fueled days.

“Since 1990 there have been four other periods where the VIX closed above 40,” Bespoke Investment Group said in a research report released yesterday. “Following each period, the S&P 500’s performance was mixed the next day and week, but over the following month and quarter, the S&P 500 has had consistently positive returns.”

Original Article by: William Patalon III, Jennifer Yousfi and Jason Simpkins - Money Morning: Surprise Rejection of Bailout Deal Causes Record Decline in U.S. Stocks, Paves the Way for a Better Accord

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