- The Washington Times - Thursday, September 18, 2008

NEW YORK

Wall Street plunged again in a crisis of confidence Wednesday as anxieties about the financial system still ran high after the government’s bailout of insurer American International Group Inc. The Dow Jones Industrial Average dropped about 450 points, and investors seeking the safety of hard assets and government debt sent gold, oil and short-term Treasurys soaring.

The market was more unnerved than comforted by news that the Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company, which lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has its tentacles in various financial-services industries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy. The ramifications of the world’s largest insurer going under likely would have far surpassed the demise of Lehman.

“People are scared to death,” said Bill Stone, chief investment strategist for PNC Wealth Management. “Who would have imagined that AIG would have gotten into this position?”

The Fed’s moves left the market worried about problems that might worsen at other financial companies.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country’s largest thrift bank. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.

Lehman filed for bankruptcy protection on Monday and, by late Tuesday, had sold its North American investment banking and trading operations to Barclays, Britain’s third-largest bank, for the bargain price of $250 million. Over the weekend, Merrill Lynch & Co., the world’s largest brokerage, sold itself to Bank of America Corp. in a last-ditch effort to avoid failure.

The Dow fell 449.36, or 4.06 percent, to 10,609.66, finishing not far off its lows of the session. After a nosedive Monday, the index is down more than 7 percent on the week, and has fallen more than 25 percent since reaching a record close of 14,164.53 on Oct. 9 last year.

Broader stock indicators also fell sharply. The Standard & Poor’s 500 Index dropped 57.21, or 4.71 percent, to 1,156.39, while the Nasdaq Composite Index fell 109.05, or 4.94 percent, to 2,098.85.

About 200 stocks rose on the New York Stock Exchange, while nearly 3,000 fell.

The stock market is likely to see heavy back-and-forth movement as traders continue to assess the flood of news that has poured in over the past several days.

On Monday, the Dow lost 504 points, the largest tumble since its drop after the September 2001 terror attacks. On Tuesday, it rose 141 points, after the Fed decided to leave interest rates unchanged.

Short-term Treasurys moved sharply higher as investors sought a safe place for at least the near future. Analysts reported heavy buying in T-bills, which range from three months to a year in maturities. But the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.41 percent from 3.43 percent late Tuesday as longer-term debt fell.

Tom di Galoma, head of Treasurys trading at Jefferies & Co., characterized the mood of the bond market as “sheer panic.” With turmoil in markets such as credit default swaps, which are essentially insurance policies against bond defaults, investors sought out alternative short-duration assets, he said.

The dollar was lower against other major currencies.

Commodities prices that have slumped in recent weeks amid growing signs of economic weakness, soared because of the appeal of hard assets.

Gold for December delivery shot up as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session; that was its largest one-day gain in dollar terms.

Crude oil that had also skidded lower amid a slowing economy rebounded $6.01 to settle at $97.16 a barrel on the Nymex after the government reported a drop in domestic crude and gas inventories. Oil dropped by about $10 a barrel on Monday and Tuesday.

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