- The Washington Times - Monday, September 15, 2008

UPDATED:

NEW YORK (AP) — A stunning reshaping of the Wall Street landscape sent stocks down sharply Monday, but the pullback appeared relatively orderly — perhaps because investors were unsurprised by the demise of Lehman Brothers Holdings Inc. and relieved by a takeover of Merrill Lynch & Co.

The Dow Jones industrial average fell 250 points, a number that has become almost commonplace over the past year amid the tumoil in the financial sector. Bond prices soared as investors sought the safety of government debt.

Stocks also posted big losses in markets across much of the globe as investors absorbed Lehman’s bankruptcy filing and Merrill Lynch’s forced sale to Bank of America for $50 billion in stock. While those companies’ situations had reached some resolution, the market remained anxious about American International Group Inc., which 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.

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 $7.74, or 64 percent, to $4.40 Monday as investors worried that it would be the subject of downgrades from credit ratings agencies.

Jeffrey Mortimer, chief investment officer at Charles Schwab Investment Management in San Francisco, said stocks’ losses aren’t steeper because the market expected Lehman would find a buyer or declare bankruptcy.

“This is showing that this was not completely unexpected,” he said, of Lehman. He added that the Merrill deal removes one possible source of concern for investors. “This may have taken a player who might have been next out of the target zone.”

In midday trading, the Dow fell 256.72, or 2.25 percent, to 11,165.27 after falling nearly 350 points seen in the early going.

Broader stock indicators also fell. The Standard & Poor’s 500 index fell 31.24, or 2.50 percent, to 1,220.46, and the Nasdaq composite index fell 38.08, or 1.68 percent, to 2,223.19.

A sharp drop in oil below $100 also weighed on energy names, including several Dow components. Exxon Mobil Corp. fell 67 cents to $76.83, while Chevron Corp. fell $1.98, or 2.4 percent, to $82.26. But consumer names like Procter & Gamble Co. rose 16 cents to $73.31 and McDonald’s Corp. added 55 cents to $64.61.

Light, sweet crude dropped $4.15 to $97.03 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.

Despite the pullback in oil, prices at the gas pump rose above $5 per gallon in some parts of the country Sunday after Ike left some the nation’s refining capacity inoperable.

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

Other financial stocks fell as investors worried about the strength of banks’ balance sheets. Washington Mutual Inc. fell 58 cents, or 21 percent, to $2.15, while Wachovia Corp. fell $3.15, or 22 percent, to $11.12. 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 about Merrill would be the next to fall.

Merrill rose $3.53, or 21 percent, to $20.58, while Bank of America fell $5.48, or 16 percent, to $28.26.

Although Monday’s selling wasn’t as steep as expected, many market observers have said for months that a cathartic sell-off is necessary for Wall Street to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. They reason that a scare and subsequent sell-off in the markets could establish conditions for a market bottom to form.

“This is sort of groundbreaking type stuff,” said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.

Fullman, who has worked on Wall Street for 29 years, noted that the Dow contains companies, such as retailers like Wal-Mart Stores Inc. that could help cushion some of the selling in the financial sector. Wal-Mart fell 13 cents to $62.28, while Coca-Cola Co. rose 56 cents to $55.06.

“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 couldn’t prevent widespread selling. Markets in Tokyo and several other Asian money centers were closed for holidays. Britain’s FTSE 100 fell 3.29 percent, Germany’s DAX index lost 2.74 percent, and France’s CAC-40 fell 3.78 percent. 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 reduced headcount of Wall Street firms Monday left Goldman Sachs Group Inc. and Morgan Stanley as the remaining big, independent firms. The two are slated to report quarterly results Tuesday and Wednesday, respectively.

The shake-up comes only a week after the government bailed out mortgage lenders Fannie Mae and Freddie Mac and ahead of sizable economic developments this week. The Fed is expected to make a decision on interest rates on Tuesday.

Declining issues outnumbered advancers by about 9 to 1 on the New York Stock Exchange, where volume came to 604.5 million shares. The Russell 2000 index of smaller companies fell 14.37, or 2.00 percent, to 705.89.

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