Nightmare on Wall Street following AIG rescue
September 17, 2008
U.S. stocks were slammed hard on Wednesday, with the Dow Jones Industrial Average closing at its lowest level since November 2005, as the government's rescue of American International Group Inc. failed to stop financial sector hemorrhaging and as credit conditions tightened. Investors worried that the financial crisis is spinning so far out of control that even government rescues can't stop it.
The Dow Jones Industrial Average shed 449.44 points, or 4.1percent, to end at 10,609.58. About $700 billion in investments vanished. Only two days earlier the Dow had suffered its steepest drop since the days after the Sept. 11 attacks.
The S&P 500 fell 57.21 points, or 4.7percent, to 1,156.38, while the Nasdaq Composite plunged 109.05 points, or 4.9percent, to 2,098.85.
One day after the Federal Reserve stepped in with an emergency loan to keep American International Group Inc. from going under, Wall Street wondered which companies might be the next to falter.
A major investor in ailing Washington Mutual Inc. removed a potential obstacle to a sale of the bank, and stock in two investment banks, Morgan Stanley and Goldman Sachs, was pummeled.
It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that another venerable investment house, Lehman Brothers, would be forced to file for bankruptcy.
The 4 percent drop Wednesday in the Dow reflected the stock market's first chance to digest the Fed's decision to issue an $85 billion taxpayer loan to AIG, which it could convert into a majority stake in the company. AIG is important because it has essentially become a primary source of insurance for the entire financial industry.
As the stock market staggered, the price of gold, which rises in times of panic, spiked as much as $90.40 an ounce. Bonds, a traditional safe haven for investors, also climbed.
"The economy is not short of money. It is short of confidence," said Sung Won Sohn, an economics professor at California State University.
The financial stocks in the Standard & Poor's 500 dropped even more, falling 10 percent, and insurance that backs corporate debt soared for the last two surviving independent U.S. investment banks, Morgan Stanley and Goldman Sachs.
Markets around the world also tumbled, with stocks dropping from Hong Kong to London. Brazil's benchmark index saw the largest drop, losing nearly 7 percent in a day.
Worse, the short-term credit markets remained frozen, with overnight interest rates soaring for loans between banks and for overnight loans to businesses. Long-term loans, however, didn't rise as much.
The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.
Treasury officials said the action did not mean that the Fed was running short of cash, but simply was a way for the government to better manage its financing needs.
Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.
A $62 billion money market fund — Primary Fund from Reserve — on Tuesday saw its holdings fall below its total deposits, a condition known as "breaking the buck" that hasn't happened to a money market fund since 1994, Rosenberg said. Money market funds are supposed to be conservatively invested and almost as safe as cash.
Stock in Washington Mutual fell 13 percent, dropping 31 cents to $2.01 amid reports that the government was trying to find a buyer for the bank, which has been battered by bad home loans. It lost $3.3 billion in the second quarter.
- MarketWatch & AP -
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