Stocks also posted big losses in as investors absorbed Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock. While those companies' situations had reached some resolution, the market remained anxious about American International Group Inc., which is seeking emergency funding to . A faltering of the world's largest insurance company likely would have financial implications far beyond that of Lehman, the largest U.S. bankruptcy.
The swift developments that took place Sunday are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt. For the first part of Monday's trading, the market was falling, but in a largely orderly fashion as investors seemed to draw some relief from the resolution of Lehman's problems.
But as the session wore on, and there was no word about AIG, the market's suffered another bout of fear that the ongoing credit crisis will continue to devastate the financial sector, and selling accelerated in the final hour. Selling then took on more momentum as stock indexes broke through levels seen at the market's earlier lows in July, an ominous sign for some traders.
Veteran trader Art Cashin told CBS News correspondent Anthony Mason that he believes there could be more casualties:
"This is the fifth time we've seen this movie. And you sit on the edge of your seat and yell at whichever character it is: 'Don't go into that woodshed!' But they keep going in," Cashin said.
The stunning developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will by presidential candidates - Republican John McCain and Democrat Barack Obama - and members of Congress on the need for stricter financial regulation.
Earlier Monday, President Bush expressed confidence that the economy is strong enough to handle fluctuations in financial markets, adding though that in the short run these adjustments "can be painful."
Investors are worried that trouble at AIG and the bankruptcy filing by Lehman, felled by $60 billion in bad debt and a dearth of investor confidence, will touch off another series of troubles for banks and financial institutions that may be forced to further write down the value of their own debt assets. Wall Street had been hopeful six months ago that the collapse of Bear Stearns would mark the darkest day of the credit crisis.
AIG's troubles are worrisome for some investors because of the company's enormous balance sheet and the risks that troubles with that company's finances could spill over to the companies with which it does business. AIG, one of the 30 stocks that make up the Dow industrials, fell $7.38, or 61 percent, to $4.76 Monday as investors worried that it would be the subject of downgrades from credit ratings agencies.
"People sense that there is still a lot more pain to be felt," said Ryan Larson, senior equity trader at Voyageur Asset Management, a unit of RBC Dain Rauscher.
The market was expected to remain fractious when trading resumes Tuesday. Besides its continuing concerns about AIG, Wall Street will be waiting anxiously for the Federal Reserve's regular policy-making meeting. The central bank is widely expected to keep rates steady, but the market will be looking for signs from the Fed that it is willing to lower rates amid the nation's continuing economic problems and also because the price of oil has retreated sharply from its highs of $147 in mid-July. The drop in oil gives the inflation-wary Fed more room to maneuver.
According to preliminary calculations, the Dow fell 504.48, or 4.42 percent, to 10,917.51, moving below the 11,000 mark for the first time since mid-July. It was the worst point drop for the Dow since it lost 684.81 on Sept. 17, 2001, the first day of trading after the terror attacks. It was also the sixth-largest point drop in the Dow, just behind the 508.00 it suffered in the October 1987 crash.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 58.74, or 4.69 percent, to 1,192.96 - also its biggest drop since 9/11 and the first time it closed below 1,200 in three years.
The Nasdaq composite index fell 81.36, or 3.60 percent, to 2,179.91; it was its worst percentage and point loss since Jan. 4.
Declining issues overwhelmed advancers on the New York Stock Exchange, where 164 stocks rose compared with 3,064 that fell. Volume came to a moderate 1.8 billion shares.
Oil closed below $100 for the first time in six months as investors worried that a slowing economy would hurt demand. Light, sweet crude fell $5.47 to settle at $95.71 on the New York Mercantile Exchange. Oil is down sharply from its mid-July highs when it hit a record over $147 a barrel.
Bond prices surged as investors fled to the security of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, plunged to 3.42 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.
Mason reports that Treasury Secretary Henry Paulson tried to reassure investors Monday.
"The American people can remain confident in the soundness and resilience of their financial system," Paulson said.
Investors likely also shrank from much bargain-hunting after Paulson said from the White House that he "never once" considered using taxpayer money to help prop up Lehman. That dashed some hopes that the federal government might come to the rescue of AIG.
But AIG pared some of its losses after New York Gov. David Paterson said in a press conference the company will be allowed to access $20 billion of assets held by its subsidiaries to stay in business. Paterson asked the state's insurance regulators to in essence allow AIG to provide a bridge loan to itself. Investors are worried that the company could need up to $40 billion to aid its balance sheet.
Other financial stocks fell as investors worried about the strength of banks' balance sheets. Washington Mutual Inc. fell 73 cents, or 27 percent, to $2, while Wachovia Corp. fell $3.56, or 25 percent, to $10.71.
Investors did have some more solid footing than they might have predicted at the end of last week, when Lehman's troubles and those of AIG weighed on the markets. A global consortium of banks, working alongside government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
And the deal for Merrill Lynch pays a 70 percent premium to the brokerage's closing price Friday. The stock has been squeezed in recent weeks, leading many Wall Street veterans to point to the company as the next behind Lehman as likely to run into trouble with bearish investors and get hit by intensified selling. The deal to pair the company with Bank of America, a huge bank with a big asset base, removes some of the worries about Merrill would be the next to fall.
Merrill rose 1 cent to $17.06, while Bank of America fell $7.19, or 21 percent, to $26.55.
Some investors said the market needed a cathartic sell-off to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. They reason that a scare and subsequent sell-off in the markets could establish conditions for a market bottom to form.
"This is sort of groundbreaking type stuff," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
Fullman, who has worked on Wall Street for 29 years, noted that the Dow contains companies, such as retailers like Wal-Mart Stores Inc. that could help cushion some of the selling in the financial sector. Wal-Mart fell 78 cents to $61.63, while Coca-Cola Co. rose 25 cents to $54.75.
But even good news like a drop in oil and some resolution to fears about Merrill couldn't prevent widespread selling. Markets in Tokyo and several other Asian money centers were closed for holidays. Britain's FTSE 100 fell 3.92 percent, Germany's DAX index lost 2.74 percent, and France's CAC-40 fell 3.78 percent. The European Central Bank, the Bank of England, and the Swiss central bank stepped in an attempt to calm markets by making more short-term credit available to banks.
The reduced headcount of Wall Street firms Monday left Goldman Sachs Group Inc. and Morgan Stanley as the remaining big, independent firms. The two are slated to report quarterly results Tuesday and Wednesday, respectively.
Goldman Sachs fell $18.71, or 12 percent, to $135.50, while Morgan Stanley fell $5.04, or 14 percent, to $32.19.
The shake-up comes only a week after the government bailed out mortgage lenders Fannie Mae and Freddie Mac and ahead of sizable economic developments this week. The Fed is expected to make a decision on interest rates on Tuesday.
The Russell 2000 index of smaller companies fell 30.50, or 4.23 percent, to 689.76.