Wall Street Posts Worst Loss Since 2001

Wall Street Posts Worst Loss Since 2001
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Stocks fell sharply Monday as investors tried to digest the turmoil on Wall Street. Henry M. Paulson Jr., the Treasury secretary, said the financial system was sound. More Photos >
http://www.nytimes.com/2008/09/16/business/16paulson.html?_r=1&th&emc=th&oref=slogin

Published: September 15, 2008

WASHINGTON — In another unnerving day for Wall Street, investors suffered their worst losses since the terrorist attacks of 2001, and government officials raced to prevent the financial crisis from spreading.
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Treasury Secretary Henry M. Paulson Jr. said the problems that lie at the heart of the financial crisis would take months to resolve. More Photos »

Trading opened sharply down Monday morning, and the mood later turned even gloomier, despite efforts by President Bush and Treasury Secretary Henry M. Paulson Jr., in separate appearances at the White House, to reassure markets that Wall Street’s deepening problems would not weaken an already anemic economy.

Amid worries that the bankruptcy of Lehman Brothers and the sale of Merrill Lynch over the weekend might not be enough to stop the downward spiral, stocks fell sharply in the last half hour of trading. By the end of the day, the Dow Jones industrial average had dropped 504.48 points, or 4.4 percent, as a record volume of more than 8 billion shares traded hands on the New York Stock Exchange. It was the biggest decline since Sept. 17, 2001 — the day the index reopened after the 9/11 terrorist attacks — when it fell 7 percent, or 684.81 points.

A concern hanging over the market is the fate of other financial companies, most notably the American International Group, one of the world’s largest insurers. After the Fed rebuffed a request by the company for a $40 billion temporary loan, federal and state officials worked on Monday to stabilize A.I.G., with the State of New York relaxing rules to allow the company to borrow as much as $20 billion in much-needed cash, while the New York Federal Reserve Bank was engaged in talks with JPMorgan Chase and Goldman Sachs on a $75 billion loan for the insurer.

Market participants fear that without a cash infusion for A.I.G., losses on its financial insurance contracts could cause a ripple effect that would damage other companies. Shares of A.I.G., already battered in recent weeks, plunged another 60 percent on Monday, closing at $4.76. Last year, the company had traded as high as $72.

The stock market’s descent in the closing minutes Monday could set the stage for more fallout on Tuesday, when Asian markets that were closed for a holiday the day before will reopen. In response to the market turmoil, officials at the Federal Reserve were considering lowering interest rates at the regularly scheduled meeting on Tuesday of the Open Market Committee, which sets monetary policy. Such a move would follow a pattern — the Fed lowered rates after the Sept. 11 attacks and after the crash of 1987 to help calm the markets — though a rate cut is far from a certainty.

The Fed also took steps to ease rules separating banks and investment banks, a move intended to make it easier for healthy companies on Wall Street, like Goldman Sachs, to buy up troubled institutions.

Wall Street was still reeling on Monday from a tumultuous weekend in which Treasury and Fed officials told top bank executives that they needed to work together to resolve the financial industry’s problems, because the government did not intend to bail out Lehman, a decision that led to Lehman’s bankruptcy filing.

Dispirited employees of Lehman arrived at work in Midtown Manhattan with little to do, with many spending their time polishing their résumés and sharing dark humor. Traders at other firms arrived at work before dawn to brace themselves for a heavy day and continued to limit their losses by unwinding their trading positions with Lehman. Nervous investors around the nation logged onto their investment accounts on the Internet to see what toll the financial tumult had taken on retirement and college-education funds.

Workers at Merrill Lynch, stunned by the respected institution’s demise as an independent brokerage firm, came to work after learning about the sale on Sunday of the company to Bank of America. While the acquisition may have saved Merrill from what some worried would be a fate similar to Lehman’s, it will come at a cost to Merrill workers. Bank of America said it planned to wring $7 billion in costs from Merrill over four years from the consolidation, a plan that could result in thousands of layoffs. At a news conference on Monday, Kenneth D. Lewis, Bank of America’s chairman, would not discuss job losses, but he repeatedly praised Merrill’s 16,000 financial advisers, calling them “the crown jewel of the company.”

Merrill employees who are laid off will have plenty of company, as many financial workers have lost jobs in the last year, leaving many without a paycheck. Appearing briefly in the morning before reporters in the Rose Garden, Mr. Bush characterized the recent events as short-term market adjustments that would have a limited effect on an otherwise sound economy.

“I know Americans are concerned about the adjustments that are taking place in our financial markets,” Mr. Bush said at a ceremony to welcome the president of Ghana.

He added: “In the short run, adjustments in the financial markets can be painful — both for the people concerned about their investments, and for the employees of the affected firms. In the long run, I’m confident that our capital markets are flexible and resilient, and can deal with these adjustments.”

But, seeking safer places for their money, investors drove down the yields of Treasury notes. Widening spreads in the credit market indicated deep skepticism about mortgage-backed securities. The price of crude oil dropped more than $5 a barrel to close to at $95.71, as investors seemed to conclude that an economic decline would cause a significant decrease in the demand for energy.
Wall Street Posts Worst Loss Since 2001
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A senior administration official, recounting the fall of Lehman, said that for weeks Mr. Paulson had been pressing Richard S. Fuld Jr., the company’s chief executive, to sell the company, but that ultimately no one in the market wanted it because of billions of dollars in bad investments the company had made in subprime mortgages and real estate. They said that Mr. Paulson told Mr. Fuld after the company reported dreadful second-quarter earnings that Lehman had to be sold or it would not survive.
The official said that, several weeks ago, Mr. Paulson had a list in his mind of major institutions that might not be able to resolve their huge investments in troubled real estate and that the list consisted of Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and Washington Mutual. The official said that Mr. Paulson also decided that it was paramount to first resolve the problems at Fannie Mae and Freddie Mac, the two huge mortgage finance companies, before turning to the others. In addition to A.I.G., the difficulties of Washington Mutual, the nation’s largest savings and loan, remain unresolved. On Monday, the shares of Washington Mutual closed down nearly 27 percent, to $2.

Mr. Paulson concluded that the financial system could survive the collapse of Lehman, which has shown signs of weakness for months.

The rapid deterioration of Bear Stearns, in contrast, took top officials by surprise last March. And Fannie and Freddie are government-created companies that are simply too large to fail — together they own or guarantee nearly half of the nation’s residential mortgages.

As throughout most of the year, Mr. Bush and the White House left most of the details about the crisis to Mr. Paulson, who told reporters at a White House briefing that the problems in the housing markets at the heart of the financial crisis would take months to resolve themselves.

“I believe that there is a reasonable chance that the biggest part of that housing correction can be behind us in a number of months,” Mr. Paulson said. “I’m not saying two or three months, but in months as opposed to years.”

Mr. Paulson sought to distinguish the government’s decision to provide financial assistance to Bear Stearns last March, as well as to rescue Fannie Mae and Freddie Mac last week, from its rejection of aid requests from Lehman Brothers and A.I.G.

“The situation in March and the situation and the facts around Bear Stearns were very, very different to the situation we are looking at here in September,” he said. “I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers.” He called the discussions on assisting A.I.G. “a private sector effort.”

Still, Mr. Paulson did not reject any future Washington bailouts.