NEW YORK ? The upheaval in the U.S. financial system sent shock waves through the stock market Monday, producing the worst day on Wall Street in seven years as investors wondered which domino would be next to fall.
The Dow Jones industrial average lost 504.48 points, or 4.42 percent, to 10,917.51, moving below the 11,000 mark for the first time since mid-July.
It was the worst point drop for the Dow since it lost 684.81 on Sept. 17, 2001, the first day of trading after the Sept. 11 terror attacks.
About $700 billion evaporated Monday from retirement plans, government pension funds and other investment portfolios.
The carnage capped a tumultuous 24 hours that redrew U.S. finance.
Lehman Brothers, an investment bank that predates the Civil War and weathered the Great Depression, filed the largest bankruptcy in U.S. history.
A second storied bank, Merrill Lynch, fled into the arms of Bank of America.
It was by far the most stomach-churning single day since a financial crisis began to bubble up from billions of dollars in rotten mortgage loans that have crippled the balance sheets of one bank after another and landed mortgage giants Fannie Mae and Freddie Mac under the control of the federal government.
?We are in the middle of a deep, dark recession, and it won?t end soon. Here it is, and it is pretty nasty,? said Barry Ritholtz, who writes the popular financial blog The Big Picture and is CEO of research firm FusionIQ.
And the fallout was far from over. American International Group, the world?s largest insurer, was fighting for its survival.
New York Gov. David Paterson moved to allow the company to tap one of its subsidiaries for an emergency $20 billion loan to stay above water.
?AIG still remains financially sound,? Paterson said.
AIG, one of the 30 stocks that make up the Dow, fell $7.38, or 61 percent, to $4.76 as investors worried that it would be the subject of downgrades from credit ratings agencies.
Late Monday, the Treasury Department and Federal Reserve rejected a request from AIG for an emergency loan and instead were pushing Goldman Sachs and J.P. Morgan Chase to create a private-sector emergency lending facility valued at at least $70 billion to help AIG stay afloat while it tries to shed valuable assets to raise capital and remain solvent.
One huge concern for the economy is that the Lehman bankruptcy will trigger even tighter credit, making it tougher for everyone ? from large companies to homebuyers ? to borrow money.
In Washington, Treasury Secretary Henry Paulson, who refused to toss a financial lifeline to Lehman, was unapologetic as the Bush administration signaled strongly that Wall Street shouldn?t expect more rescues from Washington.
Americans should remain confident in the ?soundness and resilience in the American financial system,? Paulson said.
Six months ago, Paulson moved to prevent the collapse of Bear Stearns, brokering a deal for JP Morgan Chase & Co. to buy the firm at a fire-sale price with Federal Reserve backing. Earlier this month, he stepped in to help the government seize Fannie and Freddie in hopes of reversing the housing and credit crises.
But Monday, Paulson said he ?never once? considered it appropriate to put taxpayer money at risk to resolve the problems at Lehman Brothers, which was saddled with $60 billion worth of soured real estate holdings.
The result was one of the most momentous days in Wall Street history since legendary banker J. Pierpont Morgan helped broker the rescue of financial markets during the Panic of 1907.
The Dow now has shed nearly a quarter of its value since its record high last October.
Broader stock indicators also fell. The Standard & Poor?s 500 index lost more than 4? percent, and the Nasdaq composite index lost more than 3? percent.
Financial stocks fell as investors worried about the strength of banks? balance sheets. Washington Mutual fell 27 percent to $2 a share, while Wachovia fell 25 percent to $10.71.
While Lehman Brothers was filing for Chapter 11 bankruptcy and AIG was scurrying to find financing to stay afloat, Merrill Lynch was avoiding a similar fate with a $50 billion transaction to become part of Bank of America Corp.
The deal would create a financial giant rivaling Citigroup Inc., the biggest U.S. bank in terms of assets. Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world?s largest and most widely recognized brokerage.
In downtown Santa Rosa, the 26 employees at the Merrill Lynch office were shocked and saddened by the news, said Steve Reuter, vice president of the office.
?From an employee perspective, it?s a sad day because the firm, after nearly 90 years of independence, was effectively forced into this merger,? Reuter said.
On the other hand, most employees also are shareholders in the company and they realize the merger is probably the best thing for a firm that has seen its stock price plunge from nearly $80 last October to just over $17 Friday, he said.
Employees won?t know for some time how the merger will affect their jobs. The deal is not expected to close until the end of the first quarter of 2009, he said. In the short term, clients will notice nothing.
?From a client?s perspective, not a lot is going to change for quite a while,? Reuter said.
Even after the merger is complete, the changes may be minimal.
Bank of America has said it intends to run Merrill Lynch as a wholly owned subsidiary, Reuter said. There also is little overlap between the two organizations, with Bank of America being a traditional commercial bank and Merrill Lynch specializing in investments and finance, he said.
?This has the potential to be a pretty good match,? Reuter said.
Staff Writer Kevin McCallum contributed to this story.
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