Oct. 6 (Bloomberg) -- U.S. Representative Elijah Cummings was shopping at a Safeway supermarket in Baltimore on Tuesday, Sept. 30, when an elderly woman stopped him. She was frightened, she said, because her daughter had called to tell her that her retirement account was in danger.

The day before, Cummings, a Maryland Democrat, had voted against a $700 billion financial rescue package that most of his constituents viewed as a bailout for reckless investment banks, he said. Its defeat in the U.S. House pushed the Dow Jones Industrial Average down 777 points, its biggest point drop in a single day.

Now, back at home, Cummings was confronted by symptoms of the widening financial crisis. Drew Greenblatt, president of Marlin Steel Wire Products LLC in Baltimore, told the congressman he couldn't fulfill a major order because his credit line was frozen. Students were calling Cummings' office worried that they couldn't get college loans.

``It hit me that the bleeding, the problems on Wall Street, had bled into Main Street,'' he said in an interview on Oct. 3, the day the House approved a revised rescue package. ``This is the biggest financial crisis of our lifetime.''

As the bill granted Treasury Secretary Henry Paulson the power to buy distressed securities from financial firms, tension remained over the merits of bailing out an industry that saddled itself with hundreds of billions of dollars in bad debts.

In Cummings' district, as in most of the country, there was sharp division between hostility for Wall Street and recognition of the need to revive stalled credit markets and stop the damage from spreading, lawmakers said in interviews.

Payroll Plunge

Friday's vote followed the release of data suggesting that the U.S. may be heading for its worst recession in at least a quarter century. Labor Department figures released Oct. 3 showed that payrolls fell by 159,000 during September, the most in five years, as the unemployment rate -- which was 5 percent as recently as April -- stayed at 6.1 percent. Across the country, credit markets are frozen for the second time in 13 months as banks have all but stopped lending, depriving businesses of capital and forcing them to cut spending.

The credit markets first locked up in August 2007 when two hedge funds run by New York-based Bear Stearns Cos., then the fifth-largest U.S. securities firm, collapsed after the values of their mortgage-related holdings deteriorated. Since then, waves of foreclosures on high-interest subprime home loans have produced almost $600 billion in losses on mortgage-backed securities held by banks and Wall Street firms.

Two Weeks of Talks

The crisis prompted the resignations of chief executive officers at Merrill Lynch & Co., Citigroup Inc. and UBS AG and the government takeovers of Fannie Mae and Freddie Mac, the mortgage giants, and American International Group Inc., the world's biggest insurer. It forced the sale of Bear Stearns, New York-based Merrill and Charlotte, North Carolina-based Wachovia Corp. and the bankruptcy of New York-based Lehman Brothers Holdings Inc. President George W. Bush has record low approval ratings, and lawmakers are calling for new regulation of Wall Street.

The Oct. 3 bailout vote culminated two weeks of backroom negotiations, arm-twisting and begging in Washington as the Bush administration tried to convince reluctant members of Congress that they should use taxpayer money to buy toxic assets. The 450- page bill, laden with tax breaks and other measures unrelated to the crisis, grew out of a two-and-a-half page proposal that Paulson sent to Capitol Hill early on Saturday, Sept. 20.

Two days earlier, Paulson and Federal Reserve Chairman Ben Bernanke had warned congressional leaders in a closed-door meeting that numerous banks and other companies might fail if Congress didn't approve a bailout.

Many Members Opposed

To counter the threat, Paulson was seeking unprecedented power to buy and hold as much as $700 billion in mortgage-related assets without judicial review. On Sunday, Sept. 21, Paulson went on morning talk shows including NBC's Meet the Press to sell the proposal to the public.

Congressional leaders, at least, were largely on board.

``I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts,'' Senate Banking Committee Chairman Christopher Dodd said on Monday, Sept. 22.

Yet it soon became clear that many members of Congress didn't share their leaders' sense of the inevitability of a bailout.

A group of free-market Republicans called the Republican Study Committee met that Monday and agreed on a memo it termed ``Ten Conservative Concerns With The Treasury Bailout.'' The group offered an alternative that included suspending the capital gains tax, ending mark-to-market accounting rules and privatizing Fannie Mae and Freddie Mac.

Opposition E-mails

``I'm not convinced the end of the world is upon us,'' John Shadegg, a member of the group, said that Monday. ``Just throwing money at the government and allowing the government to hand it out'' won't fix the credit crisis, he said.

Both Republicans and Democrats were reluctant to cross constituents, who were calling and e-mailing their opposition to the proposals. By Sept. 25, said Democratic Senator Barbara Mikulski of Maryland, her office had received 3,000 e-mails and 2,000 calls, fewer than 200 of them supporting a bailout.

On Tuesday, Sept. 23, signs of trouble were obvious as Vice President Richard Cheney went to Capitol Hill to meet with House Republicans in the Cannon office building.

Indiana Republican Mike Pence said it was ``very evident'' after the meeting that ``there is a growing discontent among Republicans.''

Bernanke and Paulson spent that Tuesday and Wednesday testifying before two committees. Their hours of explanations under sometimes harsh questioning did little to sway voters, lawmakers said.

Rival Plan

Congressional leaders worked to negotiate a compromise in preparation for an unprecedented White House meeting on Thursday, where they would meet with Bush and the two men vying for his job. That Tuesday, Republican presidential nominee John McCain had announced he would suspend his campaign and fly to Washington to try to help broker a deal. If a deal wasn't reached before Friday night's debate against Democratic candidate Barack Obama, he would postpone it, he said.

Meanwhile, a group of House Republicans led by Representative Eric Cantor of Virginia circulated an alternate plan calling for Wall Street firms to buy insurance on mortgage- backed securities while cutting taxes and relaxing regulation.

Barney Frank, the Democratic chairman of the House Financial Services Committee, learned of the rival plan just before the White House meeting. He called Paulson, who told him he didn't know anything about it, Frank said at a news conference afterward.

Down on One Knee

When the meeting began in the White House Cabinet Room on Thursday, Sept. 25, John Boehner, the House minority leader, told the group that House Republicans were not on board. The meeting erupted in shouting, according to staffers who attended or were briefed about it.

``Everyone at the table was throwing spears,'' one aide said Boehner told him.

McCain, who spoke last, told the group that all sides should be heard but declined to take a position on the bailout plans, according to Douglas Holtz-Eakin, his economic adviser.

As the meeting broke up and participants stormed out, Paulson followed Frank and House Speaker Nancy Pelosi. Paulson, pleading with Pelosi to keep the deal alive in spite of the partisanship, got down on one knee and begged her to push on, congressional aides who were present say.

The next day, signs of economic damage continued, as the Federal Deposit Insurance Corp. seized Washington Mutual Inc. in Seattle and New York-based JPMorgan Chase & Co. acquired its branch network for $1.9 billion.

Democrats' Demand

In Washington, the negotiations intensified. Democrats dropped their primary demand that bankruptcy judges would have the right to reduce the principle on a mortgage, lawmakers say. McCain chose to debate Obama after all.

By Monday, Sept. 29, with a two-day recess for Rosh Hashana looming, House Democrats decided to force a vote. That day, the FDIC arranged for New York-based Citigroup to buy the banking operations of Wachovia before it failed. (Since then, Wells Fargo & Co. has made an offer for all of Wachovia.)

Democratic leaders expected more than half of their members to approve the bailout measure, and Cantor, leader of the Republican opposition, signed on.

As lawmakers tried to decide whether to vote for the plan, they brought in outside economists to get unvarnished opinions.

'Hold Your Nose'

``There's a range of opinions from `hold your nose and vote no,' to `vote no,' to `scream no,''' California Democrat Brad Sherman told reporters after a two-hour meeting with economists.

In a speech on the House floor, Boehner pleaded with lawmakers to support the bailout.

``The risk of not acting is much bigger than the risk in acting,'' he said. ``I didn't come here to vote for this mud sandwich. These are the votes that separate the men from the boys and the women from the girls.''

Pelosi, a California Democrat, then rose and made a speech blaming the policies of Bush for the financial crisis. This, Republican lawmakers say, broke the bipartisan spirit their party's leaders were counting on to bring in more votes. A Pelosi spokesman denied that claim, saying the speaker had always stressed the need for bipartisanship.

The vote was called at about 1:30 p.m.

Congressman Michael Conaway, a Texas Republican, waited to see where the vote was going as he tried to decide. An accountant by training, he said he understood the risks posed by securities backed by foreclosed mortgages, yet still opposed bailing out those responsible for them. One of the last to vote, he said he stood in front of the machine with a hand on both the `yes' and `no' buttons and paused. After a moment, he pressed `no.'

Pelosi's Pleas

As the `no' votes rolled in, the Dow Jones Industrial Average tumbled, falling about 500 points while the voting was going on.

Democrats held the vote open for 40 minutes, nearly triple the usual 15 minutes, as party leaders implored colleagues to back the legislation. Pelosi could be seen on the floor pleading with fellow Democrats Bennie Thompson and Jesse Jackson Jr. to change their `no' votes to `yes.' Thompson repeatedly shook his head ``no'' at the speaker.

When the gavel went down, the bill fell 12 votes short. The Dow fell 777 points that day, and the House members went home for two days.

After the vote, the administration began an intense lobbying effort aimed at local business organizations.

Paulson and Barry Jackson, an assistant to the president, held conference calls with small business groups, community bankers and manufacturers, making their case for the bailout and urging them to call their congressmen.

`Somber Mood'

On Tuesday, Sept. 30, Paulson held a conference call with the 100 members of the board of the Independent Community Bankers of America, which has 5,000 members nationwide, said the group's president, Camden Fine. In the next two days, Fine said, the bankers sent 12,000 e-mails to their members of Congress.

In a similar call with the National Federation of Independent Business, Paulson said, ``They need to be encouraged, supported and after they take this vote they need to know they will have you all supporting them,'' a recording of the call shows.

Town Hall Meetings

Conaway, the Texas Republican, went home and held two town hall meetings in Andrews, Texas, where he talked to constituents who still opposed the bill. He said he spent much of the time explaining how vital credit markets are to the functioning of all businesses. ``By the end, it was a very somber mood,'' he said. ``Most people just told me to do what I think is right.''

Cummings, the Maryland Democrat, said he spent his recess contemplating the foreclosures plaguing Baltimore and how much worse things could get if companies like Marlin Wire shut down.

On Wednesday night, he got a call from Barack Obama. Obama, he said, told him the bill must pass ``for the good of the country.''

That same night, the Senate passed the bailout bill, which in lengthy negotiations had reached 450 pages and included a series of expiring tax provisions that on their own often take weeks or months to pass. The tax breaks, popular among members, included provisions such as relief from the alternative minimum tax and corporate credit for spending on research and development.

A House committee debated the bill on Thursday, and one by one, many of Monday's `no' voters began to publicly declare their intention to change their votes.

Market Turmoil

By Friday, the credit market turmoil was hitting local governments. U.S. states and municipalities sold about $700 million of tax-exempt bonds during the week, less than 15 percent of a typical week's new fixed-rate issues.

``This credit crisis has the power to grind the U.S. economy to a halt,'' California Governor Arnold Schwarzenegger wrote in a letter e-mailed to Paulson and posted on Schwarzenegger's Web site.

Conaway, the Texas Republican, woke up Friday morning, having decided to change his 'no' vote to `yes,' and said he was at peace.

``I'm going against the sheer weight of all the people opposed,'' he said. ``But I believe that the risk to the economy if one major company cannot roll over its commercial paper would be a catastrophic meltdown.''

The House called its second vote on the measure shortly after 1 p.m. on Friday. Boehner stood leaning against the leadership table talking to Ohio Representative David Hobson, and keeping a keen eye on the electronic tally board on the wall behind the press balcony. The votes lit up, red and green, one by one, like a Christmas display.

A total of 218 votes were needed to pass the bill. When the `yes' tally -- including Representative Cummings' affirmative vote -- topped that number, the Chamber erupted in applause.

To contact the reporter on this story: Alison Fitzgerald in Washington at Aiftzgerald2@bloomberg.net

Last Updated: October 6, 2008 00:01 EDT