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Dow Down More Than 330 on Wall St. Shake-up

Monday, 15 Sep 2008 10:22 AM

Stocks tumbled and Treasury bond prices soared Monday as investors reacted to a stunning reshaping of the landscape of Wall Street that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co. The Dow Jones industrial average fell more than 330 points.

Stocks posted big losses in markets across much of the globe as investors absorbed bankruptcy plans at Lehman and Merrill Lynch's forced sale to Bank of America for $50 billion in stock. And perhaps most ominously, American International Group Inc. is asking the Federal Reserve for emergency funding. The world's largest insurance company plans to announce a major restructuring Monday.

The swift developments are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt.

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.

But AIG's troubles a week after its stock dropped 45 percent are worrisome for some investors because of the company's enormous balance sheet and the risks that troubles with that companies 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 $5.63, or 46 percent, to $6.51 Monday as investors worried that it would be the subject of downgrades from credit ratings agencies.

"I think people were hoping that there was going to be a savior over the weekend and that hasn't happened," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. "This is sort of groundbreaking type stuff."

In the first hour of trading, the Dow fell 326.33, or 2.86 percent, to 11,095.66.

Broader stock indicators also fell. The Standard & Poor's 500 index fell 34.61, or 2.77 percent, to 1,217.09, and the Nasdaq composite index fell 44.48, or 1.97 percent, to 2,216.79.

A sharp drop in oil below $100 also weighed on energy names, including several Dow components. Exxon Mobil Corp. fell $2.06, or 2.7 percent, to $75.44, while Chevron Corp. fell $2.31, or 2.7 percent, to $81.93.

Light, sweet crude dropped $5.02 to $96.16 on the New York Mercantile Exchange after damage to Gulf of Mexico oil infrastructure from Hurricane Ike was less than investors feared. Worries about a slower economy have also weighed on oil prices in recent weeks. Oil is down sharply from its mid-July highs when it hit a record over $147 a barrel.

Investors will be watching to see whether the Dow moves below the 11,000 mark, a level it hasn't traded and closed under since mid-July. The S&P 500 last tested the 1,200 level in mid-July.

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 3.54 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.

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 that Merrill would be the next to fall after Lehman.

Merrill rose $5.13, or 30 percent, to $22.18, while Bank of America fell $3.82, or 11 percent, to $29.92.

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Stocks tumbled and Treasury bond prices soared Monday as investors reacted to a stunning reshaping of the landscape of Wall Street that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co. The Dow Jones industrial average fell more than 330...
bank,crisis
704
2008-22-15
Monday, 15 Sep 2008 10:22 AM
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