U.S. stocks suffered their sharpest one-day decline in seven years as the storm that has engulfed financial issues gained strength with the bankruptcy filing of Lehman Brothers Holdings, the takeover of Merrill Lynch by Bank of America and American International Group getting the green light from New York State officials and regulators to tap into its own capital.
The Dow Jones industrial average was down -504.48, or -4.42%. The Standard & Poor’s 500 Index was down 58.17 points, or 4.7%, to 1,193.53, its lowest level since October 2005.
The Nasdaq Composite Index was down 81.36, or -3.60%. The decline marked the largest single one-day point drop since a fall of 684.81 points on Sept. 17, 2001, the first day of trading after the Sept. 11 terrorist attacks.
“Where do we go from here? The crisis of confidence remains severe, and the financial system is nothing short of extremely fragile,” said analyst Lauren Smith at Keefe, Bruyette & Woods, in a research note to clients today.
“The unthinkable happened, Lehman is gone.”
Despite the sharp selloff on Wall Street, there were no signs of systemic problems related to Lehman. “CME Group’s clearing member, Lehman Brothers Inc., is a subsidiary of Lehman Brothers Holdings but is a separate company with its own accounts, assets and customers,” CME Group spokesman Allan Schoenberg said at the CME’S Global Financial Leadership conference in Naples, Fla.
AIG, the largest U.S. insurer, which is suffering from exposure to $57 billion in subprime securities and is at risk of seeing its own credit downgraded by rating agencies, got approval from New York Gov. David Paterson to tap $20 billion from its subsidiaries to avert a full-blown capitalization crisis. AIG shares, which traded at a 52-week high of $70.13 per share on Oct. 9, 2007, were changing hands at around $6 today, down about 60% from Friday.
In the banking sector, Washington Mutual, the largest U.S. savings and loan, fell about 27% to $2.02 today, down from its high of $39.25 on Sept. 19, 2007, amid talk that it could require government’s backing for its mortgage exposure.
With various research analysts issuing negative comments about the surviving Wall Street investment banks, Goldman Sachs Group and Morgan Stanley both posted double-digit losses. Meanwhile, major exchange-traded funds tracking the brokerage, banking and insurance sectors were mired in red ink.
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