U.S. Stocks Plunge In Dow's Worst Day Since September 2001
NEW YORK (MarketWatch) -- U.S. stocks tanked on Monday, with the Dow Jones Industrial Average plunging the most since September 2001 after Lehman Brothers Holdings Inc. filed for bankruptcy and insurance giant American International Group Inc. scurried to raise capital even as its market value was cut in half by distraught investors.
"The market can take bad news, but put it on the table. There is still a lot of news ahead, bad news," said Linda Duessel, equity strategist at Federated Investors.
The Dow Jones Industrial Average dropped 504.48 points, or 4.4%, to end at 10,917.51, with the blue-chips socked with their worst point and percentage decline since Sept. 17, 2001.
All but one of the Dow's 30 components ended in the red, with the Coca-Cola Co. the one bright spot, closing 0.5% higher.
Still, AIG proved the Dow's biggest laggard, with shares of the company down 60.8%. .
In addition to AIG, investors focused on Seattle-based thrift Washington Mutual Inc. , which has entered talks with J.P. Morgan Chase & Co. , but no deal is in place.
"Why can't we get AIG and Washington Mutual taken care of? That is this week's business," said Art Hogan, chief market strategist at Jefferies & Co.
Shares of Washington Mutual fell 26.7%.
The S&P 500 Index shed 59.01 points, or 4.7%, to 1,192.69, with financials and energy fronting the losses, which hit all of the index's 10 industry groups. .
Among the hardest hit, shares of Sunoco Inc. fell 20.2%.
With two of the largest U.S. financial firms wiped from the landscape, financial stocks declined sharply, with the S&P sector off 9.7%. .
The Nasdaq Composite Index declined 81.36 points, or 3.6%, to 2,179.91.
Treasury Secretary Henry Paulson offered reassurances in an afternoon press conference in which he called the U.S. banking system "safe and sound," while rejecting comparisons between Lehman and the March bailout of Bear Stearns.
New York Gov. David Paterson also held a news conference, saying AIG has been granted access to $20 billion of assets currently held by its insurance subsidiaries.
Volume on the New York Stock Exchange topped 1.8 billion, with decliners racing past advancing issues roughly 18 to 1. On the Nasdaq, more than 1.1 billion shares exchanged hands, and for every stock gaining, about four lost ground.
Last rites
Shares of Lehman declined 94.3% to 21 cents a share, with regulators and company executives moving to reassure individual investors that holdings in accounts at the investment bank would be protected as the firm heads into bankruptcy. .
"A Lehman bankruptcy is not like an airline bankruptcy; it's not like they can keep flying until they figure it out. Lehman is going away," said Hogan.
"More questions were left unanswered after the weekend; how does this Lehman bankruptcy affect the rest of the industry? We don't have answers for all the tricky questions that come up when somebody has $613 billion in debt and no market capitalization," commented Hogan.
The Chapter 11 filing ends the Wall Street firm's 158-year run and capped a weekend of negotiations in which potential acquirers backed away from a deal.
"The talks with Barclays and Bank of America broke down primarily because the federal government for the most part remained silent on aid. One it became apparent that if you wanted to buy Lehman, you did it pretty much off your own balance sheet, it quickly became less appealing," said Kevin Giddis, managing director, Morgan Keegan & Co.
In the face of the global financial storm, Merrill Lynch & Co. agreed to be bought by Bank of America Corp. in an all-stock deal valued at $50 billion. .
The Lehman meltdown sparked a harsh reaction from one floor trader in Chicago.
"These supposedly sophisticated suits -- there isn't a commodity trader on the floor who would do what they did. Every trader kows it isn't what you make, it's what you don't lose," said Lenny Pomerantz, a 30-year veteran of the Chicago Mercantile Exchange and Board of Trade. "They went out on a limb without even knowing it was a twig." .
Safe havens
The dollar declined the most against the Japanese yen in 10 years, but gained against the euro and the British pound on thinking the Federal Reserve would cut interest rates Tuesday.
Treasury prices jumped, pushing yields down the most since September 2001.
Interest-rate futures displayed a dramatic hike in bets that the Fed will cut its benchmark rate in coming months, with futures now showing a 17% chance that the central bank would cut its 2% borrowing costs by a quarter-percentage point at its Tuesday meeting.
"If they cut tomorrow it's because they see accelerating weakness, and the market may not like that at all," said Duessel.
Gold futures also rallied as Wall Street's troubles raised demand for safe-haven investments, with the contract for December delivery gaining $22.5 to close at $787 an ounce on the New York Mercantile Exchange. .
Oil futures tumbled to a seven-month low, with key refineries in the Gulf of Mexico apparently spared major damage from Hurricane Ike, with crude for October delivery falling $5.47 to close at $95.71 a barrel on Nymex.
Economic data had the Fed reporting U.S. industrial output fell 1.1% in August, the largest drop since Hurricane Katrina three years ago, and far worse than the 0.3% predicted by analysts. .
Separately, the New York Federal Reserve Bank reported manufacturing activity in the region declined earlier in the month, with the Empire State index falling to negative 7.4 in September from 2.8 in August.
By Kate Gibson