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.
While trading opened on a subdued note Monday, the mood later turned gloomy, despite efforts by President Bush and Treasury Secretary Henry Paulson to reassure markets that Wall Street's deepening woes would not weaken an already anemic economy.
The next challenge: engineering a $75-billion private rescue of the nation's largest insurance company, American International Group.
Stocks fell sharply amid worries that the weekend downfall of two of Wall Street's mightiest firms — the bankruptcy of Lehman Brothers and the sale of Merrill Lynch — might not be enough to stop the downward spiral. By the end of the day, the Dow Jones industrial average had dropped 504.48 points, or 4.4 percent.
Around the country, nervous investors logged onto their investment accounts to see what toll the financial tumult had taken on retirement and college funds.
The stock market's descent in the closing minutes of Monday could set the stage for more fallout today. Asian markets, closed for a holiday on Monday, reopened today sharply down.
In response to the market turmoil, officials at the Federal Reserve were considering lowering interest rates at a regularly scheduled meeting today. 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.
A concern hanging over the market is the fate of other financial companies, notably American International Group, one of the world's largest insurers.
AIG's cash crunch grew more severe Monday night when the major credit-rating agencies warned investors that the company could have greater difficulty in meeting its obligations. It was unclear whether the downgrades would force AIG to post additional collateral at a time when it is having difficulty raising money.
Market participants fear that without a cash infusion for AIG, losses on its financial insurance contracts could cause a ripple effect that would damage other companies. Shares of AIG, already battered in recent weeks, plunged a further 60 percent on Monday, closing at $4.76. Last year, the company traded as high as $72.
Wall Street was reeling 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, which led to Lehman's bankruptcy filing.
Dispirited Lehman employees arrived at work in Manhattan with little to do. At Merrill Lynch, workers worried about a similar fate.
The sale to Bank of America may have saved Merrill from what some worried would be a fate similar to Lehman's, but it will come at a cost to 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.
As shifts within the American financial industry shook the world's markets on Monday, many experts predicted that events of the past 72 hours heralded a new period of painful change for Wall Street.
The predictions were sobering. Investment banks will be smaller. Their profits will be leaner. Jobs in finance will be scarcer. And the outsize role of Wall Street in the nation's economy will shrink.
That is the extreme case. But even optimists said the immediate future would be difficult. Paulson and the Federal Reserve are paving the way for the few strong survivors to lead an industry turnaround, while letting the weaker ones fail or be subsumed by larger rivals.
Only two major U.S. investment banks, Goldman Sachs and Morgan Stanley, remain independent.
While Wall Street has gone through tough times before only to emerge bigger and stronger, some question whether the industry can rebound quickly after using high levels of leverage, or borrowed money, to binge on risky investments.
Those investments have proved to be disastrous. Worldwide, financial companies have reported more than $500-billion in charges and losses stemming from the credit crisis — a figure some experts say could eventually exceed $1-trillion.
Bush characterized the recent events as short term market adjustments that would have a limited effect.
"I know Americans are concerned about the adjustments that are taking place in our financial markets," Bush said at a ceremony to welcome the president of Ghana. "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."
The broader picture
But even as the meltdown of the housing and mortgage markets has deflated home values, touched off a rush of foreclosures, triggered a federal bailout of the mortgage giants Fannie Mae and Freddie Mac, and resulted in a massive restructuring on Wall Street, the larger economy has muddled on.
Boosted by federal stimulus payments, the gross domestic product grew at a 3.3 percent annual pace in the second quarter of 2008.
Many analysts call the growth — halting and tepid as it may be — evidence of the strength and resilience of the U.S. economy, which they say has evolved in ways that so far have allowed it to absorb the shocks to the housing and financial sectors.
Information from the Washington Post was used in this report.
Assets of Lehman Brothers before it filed the largest U.S. corporate bankruptcy ever.
Bank of America's acquisition price for Merrill Lynch.
Stock price plunge Monday of troubled AIG.