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<< Previous   of   Next >>   ADVERTISEMENT   Related Stories • There's at least one safe place for your money 9/16/08   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Tuesday, September 16, 2008 Stock market's worst day since 9/11 Associated Press NEW YORK -- The upheaval in the American financial system sent shock waves through the stock market Monday, producing the worst day on Wall Street in seven years as investors digested the failure of one of its most venerable banks and wondered which domino would be next to fall. The Dow Jones industrial average lost more than 500 points, more than 4 percent, its steepest point drop since the day the stock market reopened after the Sept. 11, 2001, attacks. About $700 billion evaporated from retirement plans, government pension funds and other investment portfolios. The carnage capped a tumultuous 24 hours that redrew U.S. finance. Lehman Brothers, an investment bank that predates the Civil War and weathered the Great Depression, filed the largest bankruptcy in American history. A second storied bank, Merrill Lynch, fled into the arms of Bank of America. It was by far the most stomach-churning single day since a financial crisis began to bubble up from billions of dollars in rotten mortgage loans that have crippled the balance sheets of one bank after another and landed mortgage giants Fannie Mae and Freddie Mac under the control of the federal government. "We are in the middle of a deep, dark recession, and it won't end soon. Here it is, and it is pretty nasty," said Barry Ritholtz, who writes the popular financial blog The Big Picture and is CEO of research firm FusionIQ. And the fallout was far from over. American Insurance Group, the world's largest insurer, was fighting for its very survival: New York Gov. David Paterson moved to allow the company to tap one of its subsidiaries for an emergency loan to stay above water. "AIG still remains financially sound," Paterson said, even as the company's stock tumbled almost 60 percent. Almost $20 billion was wiped off AIG's balance sheet Monday. In Washington, Treasury Secretary Henry Paulson, who refused to toss a financial lifeline to Lehman, was unapologetic as the Bush administration signaled strongly that Wall Street shouldn't expect more rescues from Washington. The American people should remain confident in the "soundness and resilience in the American financial system," Paulson said. Six months ago, Paulson moved to prevent the collapse of Bear Stearns, brokering a deal for JP Morgan Chase & Co. to buy the firm at a fire-sale price with Federal Reserve backing. Earlier this month, he stepped in to help the government seize Fannie and Freddie in hopes of reversing the housing and credit crises. But Monday, Paulson said he "never once" considered it appropriate to put taxpayer money at risk to resolve the problems at Lehman Brothers, which was saddled with $60 billion worth of soured real estate holdings. The result was one of the most momentous days in Wall Street history since legendary banker J. Pierpont Morgan helped broker the rescue of financial markets during the Panic of 1907. The Dow industrials dropped 504.48 points to close at 10,917.51, the first time since July they have finished under 11,000. It was the sixth-largest point drop ever and the worst since Sept. 17, 2001, when the average fell 684.81 points on the first day of trading after the terror attacks. In percentage terms, the fall for the Dow on Monday was its worst since the summer of 2002. The index has shed nearly a quarter of its value since its record high last October. Broader stock indicators also fell. The Standard & Poor's 500 index lost more than 4½ percent, and the Nasdaq composite index lost more than 3½ percent. Financial stocks fell as investors worried about the strength of banks' balance sheets. Washington Mutual Inc. shares dropped 27 percent to $2 a share, while Wachovia Corp. fell 25 percent to $10.71. While Lehman Brothers was filing for Chapter 11 and AIG was scurrying to find financing to stay afloat, Merrill Lynch was avoiding a similar fate with a $50 billion transaction to become part of Bank of America Corp. The deal would create a financial giant rivaling Citigroup Inc., the biggest U.S. bank in terms of assets. Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest and most widely recognized brokerage. "It was an opportunity of a lifetime," said Ken Lewis, Bank of America's chairman and CEO. Lewis made the announcement at a news conference where he was flanked by a smiling John Thain, Merrill's chief executive. The two put the deal together in 48 hours, while they were taking part in marathon discussions at the New York Federal Reserve over the weekend to save Lehman Brothers. Merrill stock rose a penny Monday. One huge concern is that the Lehman bankruptcy will probably trigger even tighter credit -- making it more difficult for everyone from large companies to small businesses to American homebuyers to borrow money. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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