Stocks dive just 1 day after Freddie-Fannie bailout

NEW YORK -- It took just one trading session for Wall Street to realize that the government's bailout of the nation's two biggest mortgage giants won't fix the credit crunch overnight.

Lehman's inability to strike a deal with South Korean investors prompted fresh worries. It also highlighted the difficulty other big banks may face if they need to raise cash to offset mortgage-related losses.

Lehman said Tuesday evening that it would unveil a set of "key strategic initiatives" early Wednesday. It also said it would announce its quarterly results early Wednesday, a week ahead of schedule. It is expected to report a multibillion-dollar loss.

The return of credit worries resulted in the stock market's steepest decline in nearly 19 months and erased all of Monday's big gains after the government's takeover of Fannie Mae and Freddie Mac.

The Standard & Poor's 500-stock index plunged 3.4%, its worst drop since Feb. 27, 2007, wiping out $378 billion of the index's market value, S&P says. The Dow Jones industrial average fell 280 points to 11,231, wiping out most of Monday's 290-point rally.

"The market found another trouble spot to focus on: Lehman," says John Bollinger, president of Bollinger Capital Management. "People are not convinced the credit crisis is over. When they look at a stock like Lehman and they see the kind of selling pressure it is under, it tells them that, despite everything the government says, there are still problems."

Lehman shares fell $6.36, or 45%, to $7.79, their lowest close in almost 10 years. The S&P 500's financial sector fell 6.6%. Investors in search of a safer spot to park cash flocked to U.S. Treasury bonds. The yield on the benchmark 10-year note fell to 3.59%, from 3.68% Monday.

Although investors believe the government's historic intervention will help stabilize the housing market by making home loans more affordable, they acknowledge that there's no quick fix.