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Wall Street Takes Worst Fall Since '01

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By STEPHEN LABATON

The New York Times

Published: September 16, 2008

WASHINGTON - In another unnerving day for Wall Street, investors suffered their worst losses since the Sept. 11 attacks, and government officials raced to prevent the financial crisis from spreading.

Although trading opened on a relatively subdued note Monday morning, the mood later turned gloomy, despite efforts by President Bush and Treasury Secretary Henry Paulson, in separate appearances at the White House, to reassure markets that Wall Street's deepening problems would not weaken an already anemic economy.

Amid worries that the bankruptcy of Lehman Brothers and the sale of Merrill Lynch during the weekend might not be enough to stop the downward spiral, stocks fell sharply in the last half hour of trading. By the end of the day, the Dow Jones industrial average had dropped more than 504.48 points, or 4.4 percent, as a record volume of more than 8 billion shares traded hands on the New York Stock Exchange.

The stock market's descent in the closing minutes of Monday could set the stage for more fallout today, when Asian markets that were closed for a holiday Monday reopen.

In response to the market turmoil, officials at the Federal Reserve were considering lowering interest rates at the regularly scheduled meeting today of the Open Market Committee, which sets monetary policy. Such a move would follow a pattern - the Fed lowered rates after the Sept. 11 attacks and after the crash of 1987 to help calm the markets - though a rate cut is far from a certainty.

The Fed also took steps to ease rules separating banks and investment banks, a move intended to make it easier for healthy companies on Wall Street, like Goldman Sachs, to buy troubled institutions.

A concern hanging over the market is the fate of other financial companies, most notably American International Group, one of the world's largest insurers. After the Fed rebuffed a request by the company for a $40 billion temporary loan, federal and state officials worked Monday to stabilize AIG, with New York relaxing rules to allow the company to borrow as much as $20 billion in much-needed cash, while the New York Federal Reserve Bank was engaged in talks with JPMorgan Chase and Goldman Sachs on a $75 billion loan for the insurer.

Market participants fear that without a cash infusion for AIG, losses on its financial insurance contracts could cause a ripple effect that would damage other companies. Shares of AIG, already battered in recent weeks, plunged a further 60 percent Monday, closing at $4.76. Last year, the company traded as high as $72.

Wall Street was still reeling Monday from a tumultuous weekend in which Treasury and Fed officials told top bank executives that they needed to work together to resolve the financial industry's problems, because the government did not intend to bail out Lehman, a decision that led to Lehman's bankruptcy filing.

Dispirited employees of Lehman arrived at work in Manhattan with little to do, many spending their time polishing their resumes and sharing dark humor. Traders at other firms arrived at work before dawn to brace themselves for a heavy day and continue to limit their losses by unwinding their trading positions with Lehman.

Employees of Merrill Lynch, stunned by the respected institution's demise as an independent brokerage firm, came to work after learning about the sale of the company to Bank of America. Although the acquisition may have saved Merrill from what some worried would be a fate similar to Lehman's, it will come at a cost to Merrill workers. Bank of America said it planned to wring $7 billion in costs from Merrill over four years from the consolidation, a plan that could result in thousands of layoffs.

At a news conference Monday, Kenneth D. Lewis, Bank of America's chairman, would not discuss job losses, but he repeatedly praised Merrill's 17,000 financial advisers, calling them "the crown jewel of the company."

Merrill employees who are laid off will have plenty of company, as many financial workers have lost jobs in the past year. Appearing briefly in the morning before reporters in the Rose Garden, Bush characterized the recent events as short-term market adjustments that would have a limited effect on an otherwise sound economy.

"I know Americans are concerned about the adjustments that are taking place in our financial markets," Bush said at a ceremony to welcome the president of Ghana.

He added: "In the short run, adjustments in the financial markets can be painful - both for the people concerned about their investments, and for the employees of the affected firms. In the long run, I'm confident that our capital markets are flexible and resilient, and can deal with these adjustments."

But, seeking safer places for their money, investors drove down the yields of Treasury notes. Widening spreads in the credit market indicated deep skepticism about mortgage-backed securities. The price of crude oil dropped more than $5 a barrel to close at $95.71, as investors seemed to conclude that an economic decline would cause a significant decrease in the demand for energy.

A senior administration official, recounting the fall of Lehman, said that for weeks Paulson had been pressing Richard S. Fuld, the company's chief executive, to sell the company, but that no one in the market wanted it because of billions of dollars in bad investments the company had made in subprime mortgage and real estate.

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