Global stock markets went into a dizzying overnight as the collapse of US investment bank Lehman Brothers sparked fears that more bad news is on the horizon for the finance sector and the economy.
The blue-chip Dow Jones Industrial Average tumbled below 11,000 with a slide of 4.42 percent to 10,917.51, its largest one-day point loss since the reopening after the September 2001 terrorist attacks.
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The Nasdaq composite plummeted 3.60 percent to 2,179.91 and the broad-market Standard & Poor's 500 index skidded 4.71 percent to 1,192.70.
Investors were in near-panic mode because of the uncertainty about the knock-on effect of the collapse at Lehman, a former Wall Street titan with broad connections to other financial firms.
Merrill Lynch firesale, fears for AIG
The emergency sale of Wall Street rival Merrill Lynch to Bank of America and worries about a possible collapse at insurance giant American International Group added to jitters.
“Lehman Brothers' decision to file bankruptcy and worries that the credit crisis could claim American International Group as the latest casualty are fueling the fears on the Street,” analysts at Charles Schwab & Co. said in a note to clients.
“Merrill's purchase has traders fretting that hidden problems abound and more firms could be looking at a fate similar to Lehman's.”
Meanwhile central banks, led by the US Federal Reserve, rushed to inject tens of billions of dollars into the money markets to head off any rush on liquidity as investors pulled money out of stocks and looked for safety.
Europe, Asian stocks down
Despite the moves, London's FTSE 100 index slumped 3.92 percent to 5,204.20. In Paris, the CAC 40 tumbled 3.78 percent to 4,168.97 and in Frankfurt the DAX shed 2.74 percent at 6,064.16 points.
The Euro Stoxx 50 index of leading eurozone companies lost 3.67 percent.
Asia tumbled first on the news Monday, followed by the Middle East, Russia and then Europe before the shockwave hit the North and South American markets.
“The collapse of Lehman Brothers has sent a major jolt through global financial markets as it is by far the biggest victim of the credit crisis that started in August 2007 and had been considered too big to fail,” said Global Insight economist Howard Archer.
“There is obviously widespread concern about other banks' exposure to Lehman Brothers, not only in the US but also in Europe. Lehman's collapse also increases concerns that other banks could fail.”
The US dollar came under pressure as analysts said the US central bank's Federal Open Market Committee, set to meet Tuesday on interest rates, might be forced to cut rates in a further reassurance to markets. The Fed has kept its base rate at 2.0 percent since April.
John Ryding at RDQ Economics said a rate cut might not solve the crisis but that some are concerned “about the damage to the markets that could be done if the Fed disappoints expectations.”
In New York, Lehman shares, delisted from the New York Stock Exchange, plunged 94 percent to 21 cents.
American International Group, one of the world's biggest insurance companies, slid 60.8 percent on fears it may too face a death spiral from a cash crunch and possible credit downgrade.
Merrill Lynch, Lehman's white-shoe rival on Wall Street, managed to get a lifeline over the weekend with a deal to sell itself for 50 billion dollars to Bank of America. Merrill shares rose 0.06 percent but Bank of America fell 21 percent.
Bank stocks savaged
In Europe, the banks bore the brunt of the losses as the Lehman Brothers bankruptcy undercut any notion of business as usual, dealers said.
In London, HBOS plunged 36 percent at one stage but managed to finish with a loss of 17.55 percent, reflecting concerns about a bank that had to raise fresh cash earlier this year after massive losses on its US subprime exposure.
Royal Bank of Scotland, similarly in the firing line, lost 10 percent and Barclays was down 9.84 percent.
In Canada, the S&P/TSX index slid 4.04 percent percent while the Brazilian Bovespa index, South America's largest, sank 7.59 percent.
In Asia, where Tokyo and Hong Kong were among several markets closed for a public holiday, shares fell sharply, with Sydney down 1.8 percent and Singapore off 3.27 percent.