Stocks dive: Snowballing fears on Street set us up for a fall

— -- Another day of huge losses on Wall Street caused fear to spike and prompted investors to flee risk and plow their money into super-safe U.S. government debt that basically offer a zero rate of return.

Risk aversion skyrocketed Wednesday as investors still shaken by Monday's 500-point Dow plunge were rocked with another 450-point decline, one that wiped out another $700 billion in shareholder wealth and tested the nerves of even the most committed long-term investors.

The tumultuous session sparked a massive flight to safety that drives home just how fearful investors have become as the credit crunch intensifies.

There was an abundance of signs showing just how worried investors are getting. The biggest, perhaps, was the dive in the yield of the 3-month U.S. Treasury bill, considered one of the safest investments on the planet. It closed at 0.05%, down from 1.47% on Sept. 12 and its lowest since 1941, says Bryan Taylor of Global Financial Data. That means that people are willing to park money despite getting virtually no return.

"People only want to own what is the ultimate in safety and liquidity," says Bill Hornbarger, bond strategist at A.G. Edwards. "They want to know that if they put a dollar in today, they can get a dollar out tomorrow."

Other signs of rising panic were evident. A widely watched Wall Street "fear gauge" jumped 20% Wednesday, to levels not seen since the scary moments at the bottom of the last bear market in October 2002. Investors also piled into hard assets viewed as havens, such as gold. An ounce of gold shot up $70.10 to $846.60, its biggest one-day price gain ever. Even crude oil regained its stature as a place to park cash in a crisis. A barrel of crude rose $6.01 to $97.16.

Startling events on Wall Street since the weekend have pushed investors into fight-or-flight mode as they see news events shred their portfolios. Sunday kicked off on an ugly note as investment bank Lehman Bros., a major Wall Street player for 150 years, prepared to file for bankruptcy protection. Then came equally shocking news that storied brokerage Merrill Lynch was pushed into a late Sunday marriage with Bank of America. Then Tuesday, the government announced a bailout for failing insurer American International Group, including an $85 billion loan.