Wall Street sees worst day since just after 9/11 attacks, with Dow down 500 points, as financials melt down.
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Last Updated: September 15, 2008: 4:09 PM EDT
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NEW YORK (CNNMoney.com) -- Stocks tanked Monday, as investors reeled amid the fallout from the largest financial crisis in years after Lehman Brothers filed for the biggest bankruptcy in history and Bank of America said it would buy Merrill Lynch in a $50 billion deal.
Treasury prices rallied as investors sought the comparative safety of government debt, sending the corresponding yields lower. Oil prices tumbled, falling well below $100 a barrel on slowing global economic growth. The dollar rallied versus other major currencies and gold prices spiked.
The Dow Jones industrial average (INDU) lost 500 points, or 4.4%, according to early tallies. It was the biggest one-day point decline for the Dow since Sept. 17, 2001, when the market reopened for trading after having been closed in the aftermath of 9/11 terrorist attacks.
The Standard & Poor's 500 (SPX) index lost 4.5% and the Nasdaq composite (COMP) lost 3.6%.
Global markets tumbled as investors reeled after Lehman Brothers filed for bankruptcy, Merrill Lynch was forced to sell itself to Bank of America and investors awaited AIG's restructuring announcement.
Worries in the afternoon focused around Dow-component insurer AIG, which has been scrambling to raise enough cash to fend off ratings agency downgrades and stay afloat.
In the afternoon, N.Y. Gov. David Paterson said AIG will be allowed to use $20 billion in assets through its subsidiaries to stay afloat, basically providing itself with a bridge loan. AIG has also reportedly asked the Federal Reserve for a roughly $40 billion bridge loan over the weekend.
Meanwhile, Reuters reported that sources say talks with Warren Buffett's Berkshire Hathaway about investing in AIG have ended.
Shares of AIG (AIG, Fortune 500) were down 52%, near where they stood before the announcement.
Still, some analysts said that the stock selloff could have been worse, considering the depth of the problems.
"You have to throw out the history books because there's really nothing to compare this to," said Jim Dunigan, chief investment officer at PNC Advisors.
Art Hogan, chief market strategist for Jefferies & Co., said the magnitude of the financial industry fallout is unprecedented, and could only be compared to the Great Depression of the 1930s or the railroad bankruptcies of the 1800s.
"We've never witnessed this before," said Hogan. "There's no road map for this."
The developments for the three companies cemented for investors that the credit crisis is far from over, six months after the near-collapse and government rescue of Bear Stearns.
"The landscape has changed and a lot of the major players who were are no more, so of course people are panicked," said Stephen Leeb, president at Leeb Capital Management.
"But it's not the end of capitalism," he said. "This may usher in something worse than what we've seen in terms of the economy, but the companies left standing at the end of this will be OK."
Merrill Lynch's buyout was perhaps providing some reassurance to investors, said Dunigan, in that it shows there is still value in the market.
Losses were also tempered by the Federal Reserve's decisions to loosen up its lending restrictions. The central bank could end up cutting the fed funds rate, its key overnight bank lending rate, when it meets Tuesday, analysts said. The fed funds rate currently stands at 2.0%.
Also helping Tuesday: news that a group of 10 banks including Morgan Stanley, Goldman Sachs and Barclays had given up to $7 billion each to create a $70 billion lending pool to help smaller institutions.
Lehman bankruptcy: Lehman Brothers (LEH, Fortune 500) announced it was filing for bankruptcy, after weekend talks aimed at saving the 158-year old firm failed.
The filing came shortly after midnight Monday, after Bank of America and Barclays pulled out of negotiations to acquire Lehman, which has lost $60 billion in bad real estate bets and the credit market's collapse.
Unlike with Bear Stearns back in March, the government was reportedly not willing to help finance a takeover, bailout or restructuring of Lehman Brothers. This reportedly contributed to the reluctance of other firms to strike a deal with the troubled company.
Speaking in the afternoon, Treasury Secretary Henry Paulson said that he hasn't ruled out additional government bailouts for the future. He also said that the banking system is sound. (Full story).
Lehman shares plunged 94%. (Full story)
Merrill Lynch buyout: After pulling out of the Lehman negotiations, Bank of America (BAC, Fortune 500) announced that it will buy Merrill Lynch (MER, Fortune 500) for $50 billion in stock. The price values the company at more than $29 a share, a more than 70% premium from Merrill's closing price on Friday of $17.05.
The company has posted losses of more than $17 billion over the last four quarters and saw its stock plunge 27% last week.
Shares gained 14% Monday afternoon, while Bank of America tumbled 20%. A variety of other financial shares plunged, including Washington Mutual (WM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).
AIG: Insurer AIG (AIG, Fortune 500) plunged 55% as Wall Street awaited the details of its restructuring plan, expected to be announced Monday.
The company has lost more than $18 billion in the wake of the subprime mortgage crisis and is in desperate need of cash to maintain its credit ratings and investor faith.
Should the company fail to raise cash and see its credit rating cut by the ratings agencies, it may have only two to three days to survive, according to a source close to the firm. (Full story).
AIG stock fell 50%.
Market breadth was negative, with losers beating winners by almost 7 to 1 on volume of 1 billion shares. On the Nasdaq, decliners topped advancers by over three to one on volume of 1.81 billion shares.
10-bank emergency fund: In a bid to calm the markets, the Federal Reserve announced plans Sunday to loosen its lending restrictions to the banking industry. A consortium of 10 leading domestic and foreign banks, including Goldman Sachs (GS, Fortune 500), Citigroup (C, Fortune 500), Barclays (BCS) and Morgan Stanley (MS, Fortune 500), agreed to create a $70 billion fund to lend to troubled financial firms.
The Federal Reserve, meeting Tuesday, could cut the fed funds rate, a key short-term interest rate, from the current level of 2%, analysts said.
Oil: Oil prices plunged as investors continued to bet on a global economic slowdown. Additionally, early reports showed Hurricane Ike didn't do as much damage to oil rigs and refineries in the Texas Gulf region as expected.
Oil prices were down $5.50 a barrel to $95.68. Oil dipped below $100 a barrel on Friday for the first time in five months.
Other markets: In global trade, European and Asian stocks ended lower. Many major Asian markets, including Tokyo and Hong Kong, were closed for holidays.
Treasury prices soared as investors poured money into the relatively safe-haven. The rally sent the benchmark 10-year note tumbling to 3.52% from 3.72% late Friday.
In currency trading, the dollar rallied versus the yen and euro.
COMEX gold for December delivery gained $19.20 to $783.70 an ounce.
