U.S. Stock Indexes Plummet As Fate Of Financials Questioned

NEW YORK (MarketWatch) -- U.S. stocks were slammed hard on Wednesday for a third day in four as the government's rescue of American International Group Inc. failed to stop financial sector hemorrhaging and as credit conditions tightened.

Shares of Morgan Stanley plunged as much as 40%, and Goldman Sachs shares were down 24.4%, as federal regulators rushed to tighten rules against short-selling before another major Wall Street securities firm faces collapse. Gold futures leaped almost $60 an ounce to $840.

"The Fed is trying to provide liquidity as quickly as it can, but there seems to be an endless supply of 'moles' and only one mallet," said Kevin Giddis, managing director, Morgan Keegan & Co. Inc. "Credit is seizing as we speak. The banks aren't really lending to each other."

The Dow Jones Industrial Average plunged more than 3% and was last off 347.58 points to 10,711.44, with all but two of its 30 components trading lower.

AIG fronted the blue-chip declines, its stock falling 38.7% to $2.3 a share.

A spokesperson for Dow Jones Indexes declined comment on whether the index provider might remove AIG from the blue-chip index. Dow Jones Indexes was monitoring the situation, the company said in a statement late Tuesday.

Pharmaceutical giant Johnson & Johnson proved the Dow's brightest stock, with shares of the company rising 0.9%.

The S&P 500 declined 47.62 points, or 3.9%, to 1,165.97, with financials leading sector losses among the index's 10 industry groups, off 8.3%.

The Nasdaq Composite dropped 82.81 points, or 3.8%, to stand at 2,125.09. Virtualization software company VMware Inc. was among the tech stocks hit, its shares down 16% as analysts expressed concerns about its business. .

Volume neared 989 million shares on the New York Stock Exchange, and for every stock on the rise, 15 were on the decline. On the Nasdaq, nearly 661 million shares exchanged hands, and decliners led advancers about 6 to 1.

New rules

In a bid to protect investors from so-called "naked" short selling of securities, the Securities and Exchange Commission is requiring short sellers and their broker dealers to deliver securities by the close of business on the settlement date, starting Thursday.

"It would seem that the government's role in the private sector is experiencing a Renaissance following its bailouts in the finance and insurance sectors," said analysts at Action Economics.

Also weighing on equities, the Commerce Department estimated its count of new building permits for single-family homes fell to a 26-year low. .

The federal takeover of AIG triggered safe-haven buying of gold and other commodities, with gold futures climbing $70.3 to $850.80 an ounce on the New York Mercantile Exchange. .

Elsewhere on Nymex, crude-oil futures gained, recently up $2.43 at $93.58 a barrel.

A bridge to ?

The government's takeover of AIG, made through an $85 billion loan, came late Tuesday after regulators acknowledged the company's failure would create havoc in the world's financial system. .

Experts say the bailout gives AIG some time to sell businesses such as its aircraft-leasing unit. .

Barclays said it would pay $1.75 billion to buy the U.S. investment banking and capital markets operations of Lehman Brothers Holdings Inc. , with the deal needing approval of U.S. bankruptcy courts. .

Shares of Morgan Stanley continued their recent slide, at last check off 36.9%, after the investment bank pre-announced earnings and investors reacted to speculation the company may be compelled to find a buyer.

"The carnage in the financial markets has taken down several pillars of the U.S. financial system, including Bear Stearns, Lehman Brothers, and Merrill Lynch, and currently threatens Morgan Stanley and Goldman Sachs," said analysts at Action Economics.

Lehman plunged 56.7%.

Overseas, shares inEurope slid into the red, with the pan-European Dow Jones Stoxx 600 index falling 0.7% to 261.81. .

In Asia, markets ended mixed, with the Hong Kong's Hang Seng Index falling 3.6% to end at 17,637.19, its lowest level since October 2006. .

On Tuesday, U.S. stock indexes climbed on reports of an imminent AIG rescue, with the market largely bypassing the Fed's decision to leave its benchmark lending rate unchanged at 2%.

By Kate Gibson