NEW YORK — A stunning makeover of the Wall Street landscape sent stocks falling precipitously Monday, with the Dow Jones industrials losing 500 points in their worst slide since the September 2001 terrorist attacks. Investors recoiled after a shakeup of the financial industry that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
The pullback, which erased about $700 billion in shareholder wealth, occurred across much of the globe as investors absorbed Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch 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 is seeking funding to shore up its balance sheet. A faltering of the world's largest insurance company likely would have implications far beyond that of Lehman, already the largest U.S. bankruptcy in terms of assets.
The swift developments that took place Sunday are the biggest yet in the 14-month-old credit crisis that stems from now toxic subprime mortgage debt.
For the first part of Monday's trading, the market was falling, but in a largely orderly fashion as investors seemed to draw some relief from the resolution of Lehman's problems. As the session wore on, and there was no word about AIG, the market suffered another bout of fear that the credit crisis will continue to devastate the financial sector. Selling accelerated in the final hour and then took on more momentum as stock indexes broke through lows set in July _ an ominous sign for some traders.
Monday's trading followed the pattern of the past year; there were some signs of optimism, but they were dashed when investors weary of bad news perceived there was more ahead.
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 Cos. would mark the darkest day of the credit crisis.
AIG's troubles are worrisome for some investors because of the company's enormous balance sheet and the risks that its troubles could spill over to the companies with which it does business. AIG, one of the 30 stocks that make up the Dow industrials, fell $7.38, or 61 percent, to $4.76 as investors worried that it would be the subject of downgrades from credit ratings agencies.
"We have a very, very nervous market and folks hate uncertainty," said Alfred E. Goldman, chief market strategist at Wachovia Securities in St. Louis. "They've been waiting for another shoe to drop and two of them dropped on Sunday."
The market was expected to remain fractious when trading resumes Tuesday. Besides its continuing concerns about AIG, Wall Street will be waiting anxiously for the Federal Reserve's regular policy-making meeting. The central bank is expected to keep rates steady, though some traders have speculated about a surprise rate cut. The market will be looking for signs from the Fed that it is willing to lower rates amid the nation's continuing economic problems and because the price of oil has retreated sharply from its highs in July. The drop in oil gives the inflation-wary Fed more room to maneuver.
The Dow fell 504.48, or 4.42 percent, to 10,917.51, moving below the 11,000 mark for the first time since mid-July. It was the worst point drop for the Dow since it lost 684.81 on Sept. 17, 2001, the first day of trading after the terror attacks.
In percentage terms, the drop was the steepest since July 19, 2002. It was also the sixth-largest point drop in the Dow, just behind the 508.00 it suffered in the October 1987 crash.
The Dow is now down about 23 percent from its record high of 14,198.09 last October.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 59.00, or 4.71 percent, to 1,192.70 _ also its biggest drop since 9/11 and the first time it closed below 1,200 in three years.
The Nasdaq composite index fell 81.36, or 3.60 percent, to 2,179.91; that was its worst point loss since Jan. 4.
The Dow Jones Wilshire 5000 Composite Index, an index that measures the value of 5,000 U.S.-based companies, fell 4.53 percent Monday, giving investors an overall paper loss of about $700 billion.
Declining issues overwhelmed advancers on the New York Stock Exchange, where 164 stocks rose compared with 3,064 that fell. Consolidated volume came to an extremely heavy 8.05 billion shares, compared with 6.11 billion traded Friday.
Oil closed below $100 for the first time in six months as investors worried that a slowing economy would hurt demand. Light, sweet crude fell $5.47 to settle at $95.71 on the New York Mercantile Exchange. Oil is down sharply from its mid-July highs when it hit a record over $147 a barrel.
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 3.41 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.
Investors likely shrank from snapping up any bargains Monday after Treasury Secretary Henry Paulson said from the White House he "never once" considered using taxpayer money to help prop up Lehman. That punctured some hopes that the federal government might come to the rescue of AIG.
But AIG pared some of its losses after New York Gov. David Paterson said the company will be allowed to access $20 billion of assets held by its subsidiaries to stay in business. Paterson asked the state's insurance regulators to in essence allow AIG to provide a bridge loan to itself. Investors are worried that the company could need up to $40 billion to aid its balance sheet.
Other financial stocks fell as investors worried about the strength of banks' balance sheets. Washington Mutual Inc. fell 73 cents, or 27 percent, to $2, while Wachovia Corp. fell $3.56, or 25 percent, to $10.71.
Merrill rose 1 cent to $17.06, while Bank of America fell $7.19, or 21 percent, to $26.55.
Goldman noted, however, that the market's sell-off wasn't the cathartic move the market needed to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. At some point, he contends, stock valuations will prove too tempting for investors sitting on the sidelines with piles of cash.
"At some point the sellers have done their dastardly deed," he said.
Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York, said investors should remember that while the financial sector founders, others like consumer names aren't suffering as much.
"While they might get hit hard they won't get hit as hard," said Fullman.
Wal-Mart Stores Inc. fell 78 cents to $61.63, while Coca-Cola Co. rose 25 cents to $54.75.
But even good news like a drop in oil and some resolution to fears about Merrill couldn't prevent a sell-off abroad. Markets in Tokyo and several other Asian money centers were closed for holidays. Britain's FTSE 100 fell 3.92 percent, Germany's DAX index lost 2.74 percent, and France's CAC-40 fell 3.78 percent.
The Russell 2000 index of smaller companies fell 30.50, or 4.23 percent, to 689.76.
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com