Shares tumbled today as US investors reacted to a stunning reshaping of the landscape of Wall Street.
The Dow Jones industrial average fell 300 points on the back of the end of Lehman Brothers and Merrill Lynch, but the market’s initial losses were not as steep as some investors had feared.
Markets across much of the globe fell as investors absorbed bankruptcy plans at Lehman and Merrill Lynch’s forced sale to Bank of America.
Perhaps most ominously, American International Group asked the Federal Reserve for emergency funding and plans a major restructuring.
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 dollars 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 shares dropped 45% are worrying some investors because of the company’s enormous balance sheet and the risks that troubles with its 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 42% 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 saviour over the weekend and that hasn’t happened,” said Scott Fullman, of WJB Capital Group in New York. “This is sort of groundbreaking type stuff.”
In midmorning trading, the Dow fell 301.66, or 2.64 percent, to 11,120.33.
Oil prices also fell below 100 dollars. Light, sweet crude dropped 4.53 dollars to 96.65 dollars 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 also weighed on oil prices in recent weeks. Oil is down sharply from its mid-July highs when it hit a record over 147 dollars a barrel.
Investors will be watching to see whether the Dow moves below the 11,000 mark, a level it has not traded and closed under since mid-July.
Bond prices surged as investors fled to the security of government debt and 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 dollar pool of funds to lend to troubled financial companies.
Many market observers have said for months that a cathartic sell-off was necessary for Wall Street to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. They reasoned that a scare and subsequent sell-off in the markets could establish conditions for a market bottom to form.
Mr Fullman, who has worked on Wall Street for 29 years, compared the uncertainty over the market’s reaction to the days after the September 11 terror attacks.
“The fact was that nobody knew how bad things would get in the marketplace,” he said.
However he noted that the Dow industrials contain companies, such as retailers like Wal-Mart Stores that could help cushion some of the selling in the financial sector.
“While they might get hit hard they won’t get hit as hard,” he said.
But even good news like a drop in oil and some resolution to fears about Merrill could not prevent widespread selling. Markets in Tokyo and several other Asian money centers were closed for holidays. But in afternoon trading in Europe, Britain’s FTSE 100 fell 4.23%, Germany’s DAX index fell 3.69%, and France’s CAC-40 fell 4.84%. 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 shake up comes only a week after the government bailed out mortgage lenders Fannie Mae and Freddie Mac and ahead of sizeable economic developments this week. The Fed is expected to make a decision on interest rates tomorrow.