U.S. stocks fell moderately at the opening bell Monday, then got worse, after the stunning reshaping of the Wall Street landscape. The Dow Jones industrials opened down less than 100 points, was soon was off nearly 300 and later was off about 200.
Investors must absorb the bankruptcy filing at Lehman Brothers and Merrill Lynch's forced sale to Bank of America for $50 billion in stock. And perhaps most ominously, American International Group is reportedly 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.
Broader stock indicators also fell in the U.S.
A sharp drop in oil below $100 also weighed on energy names, including Dow components ExxonMobil and Chevron.
Global stocks fared much worse as a feverish sell-off in Europe and Asia turned markets sharply lower.
The FTSE-100 share index was down 4.07% in London, the Paris CAC-40 was off 4.5% and Germany's DAX 30 index of blue chips sagged 3.23%.
The falls were led by insurance and financial stocks.
"We will have a shakeout today and there will probably be more damage in the afternoon when the U.S. gets going," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London.
Europe's major central banks moved quickly to calm markets Monday, pumping billions of euros and pounds into the financial system. The European Central Bank loaned 30 billion euros but said it received 51 bids for 90.3 billion euros on its one-day tender with a bid rate of 4.25% — a clear sign that demand for cash is over the top.
Similarly, the Bank of England offered up 5 billion pounds in a three-day auction — but bids were nearly five times higher, at 24.1 billion pounds.
The Swiss National Bank said it was also providing liquidity in "a generous and flexible manner" at an overnight rate of 1.9%, but wouldn't say how much was on offer.
Speaking at an awards ceremony at Frankfurt city hall, ECB President Jean-Claude Trichet said policymakers must be "extraordinarily alert" for jitters in financial markets, spooked by the credit turmoil that stems from now-toxic subprime mortgage debt.
"It is an ongoing market correction with episodes of high level of volatility, it is what we have experienced since now a long period of time and is going on," he said.
Late Sunday night, 10 leading banks announced they had created a special $70 billion lending pool for troubled financial institutions. And the Federal Reserve announced it would make it easier for the firms to borrow from it.
Talks to find a buyer for Lehman apparently stalled Sunday as Bank of America and Barclays Bank walked away.
Early Monday, Bank of America BAC said it would acquire Merrill Lynch MER for around $50 billion. Merrill Lynch stock had fallen 12.3% to $17.05 Friday, as traders worried that Merrill could be the next firm caught in the vise of the credit crunch.
The deal stops speculators whose next target after Lehman would have been Merrill, Cantor Fitzgerald's Pope said.
The moves will create a "firebreak in the financial structure," and once disappointment that Lehman didn't manage to make a deal has been digested, stocks will start to recover, he said.
Rising mortgage defaults amid the collapse of the housing bubble left many financial firms holding billions in investments backed by bad loans. Merrill Lynch, AIG aig and Lehman are just the latest victims of the credit crunch, which has also clobbered mortgage giants Fannie Mae fnm and Freddie Mac fre, subprime lenders IndyMac Bank and Countrywide Financial, and investment bank Bear Stearns.
Lehman is an investment bank, so its bankruptcy could disrupt billions of dollars in financial transactions, spreading financial pain worldwide. Lehman account holders would be protected up to $500,000 by the Securities Investors Protection Corp.
"You don't know if the Dow will be up 300 points or down 300 points," says Richard Suttmeier, chief market strategist at ValueEngine.com. Futures on the Dow Jones industrial average fell 306 points Sunday.
Talks to buy Lehman apparently collapsed because the government refused to guarantee buyers against losses from Lehman's extensive holdings of mortgage-backed securities.
In recent months, the Fed and Treasury have taken measures aimed at buying time for the economy to recover and at reducing pressure on financial firms, including supporting an economic stimulus bill and legislation to calm the mortgage market.
A Lehman bankruptcy was the largest financial collapse since 1990, when investment bank Drexel Burnham Lambert failed.
Government officials said the situation was not the same sort of crisis as the mid-March meltdown of Bear Stearns, when the Fed late on a Sunday evening agreed to make a $29 billion loan to facilitate the sale of that investment bank to JPMorgan Chase. jpm
The Wall Street Journal reported that AIG is trying to raise money to cushion its losses. The insurer is expected to announce a reorganization today and to sell some assets.