By Tom Petruno

USA, Los Angeles - THE anti-bailout crowd got what it wanted on Monday: More pain for Wall Street fat cats, to the tune of the biggest one-day drop in most stock indexes since the 1987 market crash.

Unfortunately, that pain also was felt in the not-so-fat 401(k) retirement savings plans of millions of Americans.

The 777-point, 7 per cent plunge in the Dow Jones industrial average, triggered in large part by the House's 'no' vote on the White House's US$700 billion financial system rescue, points to the dilemma for many of those who oppose the measure as a handout to Wall Street.

Few really want to help the investment and commercial bankers who dug their own graves by lending recklessly during the housing bubble.

But amid deepening gloom about the financial system and the economy, rooting for the banks' demise now risks more days like Monday - when many people saw the value of their stock holdings fall by near double-digit percentages in six-and-a-half hours of trading.

That's going to hurt the average worker with money in the market far more than it will hurt a bank executive with millions of dollars to spare and a generous pension to boot.

On Monday, the selling was so fierce that only a relative handful of stocks rose. And many companies that have nothing to do with banking were hammered.

Shares of Google Inc plummeted 12 per cent to US$381, a two-year low. US Steel Corp tumbled 17 per cent. Energy giant Chevron Corp slumped 11 per cent.

I can only imagine that some people who oppose the bailout are smelling a conspiracy. After all, the more damage stock prices suffer, the greater the pressure for the House to come back and approve the Bush administration's proposal or some version of it that achieves the same end: using public money to buy up toxic mortgages from lenders and investors.

On CNBC early on Monday, with the Dow down about 500 points, one commentator said that the 'worst thing that could happen' would be for the market to rally back by the closing bell and lose only a couple of hundred points.

That, he said, would suggest to House members who voted against the plan that the market could live without it after all.

Wall Street blackmail? More likely, what's happening with stocks is mirroring what has been happening in the banking system for the past few weeks: Frightened lenders, brokerages and other financial institutions are increasingly hoarding cash rather than putting the money into the economy in the form of a loan or an investment.

'There's a lot of cash out there,' said Jerry Webman, senior investment officer at money management company OppenheimerFunds in New York. 'The problem is that no one has the confidence to commit it to an investment.'

Proponents' argument for the bailout is that toxic mortgage debt is such a huge weight on the financial system that lenders can't begin to function normally again unless the government helps to clear some of the loans away.

That's the technical aspect of the bailout. Perhaps just as important, the plan's supporters say, is the psychological boost that a government rescue could give to lenders and investors who now fear a downward spiral as credit stops flowing to the economy because of the iced-over banking system.

The shutdown of credit, in turn, could lead to more loan defaults, more layoffs, less spending and a shrinking economy, all of which could make people with money even less willing to put it into the financial system.

'The spiral needs to be broken by a dramatic infusion of confidence,' said Quincy Krosby, chief investment strategist at Hartford Financial Services Group in Hartford, Connecticut.

And Wall Street's view is that only one entity is big enough to accomplish that: Uncle Sam.

Over the past year, although share prices overall have fallen, the market's losses have been a sideshow to the debacle in the credit markets. Panic selling in stocks had mostly been in the financial sector, as a lengthening list of big banks and brokerages have collapsed.

With Monday's historic dive, the stock market now is reflecting a level of fear among investors that, by some measures, is greater even than what gripped them after the Sept 11, 2001, terrorist attacks.

What's more, the extent of the market's decline from last year's record highs now has reached a threshold of pain that will challenge many buy-and-hold individual investors.

With Monday's drop, the Standard & Poor's 500 index - a benchmark for many buy-and-hold portfolios - is down 29 per cent from the all-time high reached on Oct 9. That is still within the limits of the average bear market loss of 34 per cent since 1937. In other words, the S&P index could fall another per cent or so before bottoming, and the peak-to-trough decline would be no worse than the typical such slide in times of economic turmoil.

But the last bear market was far worse than average. From 2000 to 2002, amid the collapse of the dot-com bubble, the S&P index plunged 49 per cent, the biggest drop since the latter years of the Great Depression.

With many broad market indexes now down 30 per cent or so from their highs last year, the question is whether small investors who rode out the 2000-02 stock decline will be willing to ride this one out as well, even as the dire straits of the financial system increasingly evoke frightening images of the 1930s.

'There's no reason to say we can't have two mega-meltdowns in the same decade,' concedes Sam Stovall, investment strategist at Standard & Poor's in New York.

People who oppose the bailout plan, and who want financial companies to pay for their sins in the housing debacle, might believe they won a great victory on Monday.

The question is, will it still be a victory a week from now if the stock market is 25 per cent lower, the economy is skidding into a deep recession and Main Street, like Wall Street, finds credit nowhere to be had? - LAT

This article was first published in The Business Times on October 01, 2008.