Stocks Tumble Again

By ELLEN SIMON

By Ellen Simon

The Associated Press

NEW YORK

Stocks took another nosedive Wednesday as the American banking system appeared even shakier and investors worried that the financial crisis is spinning so far out of control that even government rescues can’t stop it.

The Dow Jones industrial average, which only two days earlier had suffered its steepest drop since the days after the Sept. 11 attacks, lost another 449 points . About $700 billion in investments vanished.

One day after the Federal Reserve stepped in with an emergency loan to keep American International Group Inc., one of the world’s largest insurers, from going under, Wall Street wondered which companies might be the next to falter.

Investors fear that a failure of AIG would set off even more financial turmoil than the collapse this week of investment bank Lehman Brothers.

“People are scared to death,” said Bill Stone, chief investment strategist for PNC Wealth Management. “Who would have imagined that AIG would have gotten into this position?”

A major investor in ailing Washington Mutual Inc. removed a potential obstacle to a sale of the bank, and stock in two investment banks, Morgan Stanley and Goldman Sachs, was pummeled.

Morgan Stanley and Wachovia Corp. are in talks about a possible combination as the investment bank tries to come up with ways to survive the ongoing credit crisis, according to media reports.

John Mack, Morgan Stanley’s chief executive, received a call from Wachovia about a potential deal, according to The New York Times and The Wall Street Journal. Both newspapers cited people familiar with the discussions.

Spokesmen for Morgan Stanley and Wachovia, which is based in Charlotte, N.C., declined to comment.

Meanwhile, the share prices of some of Hampton Roads’ community banks came under pressure from the wave of selling.

Darrell Swanigan, president and chief executive officer of SuffolkFirst Bank and its parent, First Bankshares Inc., attributed some of the investor concern to uncertainty about regulators’ plans for AIG and the government-owned mortgage companies Fannie Mae and Freddie Mac.

“I don’t think anybody knows how this is going to shake out until there’s more definition as to what they are going to do,” Swanigan said, referring to the Federal Reserve and the Treasury Department.

Shares of First Bankshares fell 21 cents to $5.20, while TowneBank, the largest bank based in the region, declined 80 cents to $19.61. The price of Commonwealth Bankshares, the Norfolk-based parent of Bank of the Commonwealth, retreated 69 cents to $14.11.

Gateway Financial, the Virginia Beach-based parent of Gateway Bank & Trust Co., edged up 11 cents to $4.27 after a sharp drop last week. Monarch Financial, parent of Monarch Bank in Chesapeake, ended the day unchanged at $8.

It was the fourth consecutive day of turmoil for the American financial system, beginning with news Sunday that another venerable investment house, Lehman Brothers, would be forced to file for bankruptcy. The 4 percent drop Wednesday in the Dow reflected the stock market’s first chance to digest the Fed’s decision late Tuesday to issue an $85 billion taxpayer loan to AIG, which effectively gives it a majority stake in the company .

“The economy is not short of money. It is short of confidence,” said Sung Won Sohn, an economics professor at California State University.

The financial stocks in the Standard & Poor’s 500 dropped even more, falling 10 percent, and insurance that backs corporate debt soared for the last two surviving independent U.S. investment banks, Morgan Stanley and Goldman Sachs.

“It seems as though banks are hoarding cash, no matter what rate they could be lending it at,” said David Rosenberg, North American economist at Merrill Lynch.

Markets around the world also tumbled, with stocks dropping from Hong Kong to London. Brazil’s benchmark index saw the largest drop, losing nearly 7 percent in a day.

Worse, the short-term credit markets remained frozen, with overnight interest rates soaring for loans between banks and for overnight loans to businesses. Long-term loans, however, didn’t rise as much.

“The worry on short-term loans is you’re not sure who the ultimate borrower is,” said Brian Bethune, chief U.S. economist at Global Insight Inc.

Mortgage rates, which had fallen after the government’s takeover of Fannie Mae and Freddie Mac, rose again, removing a glimmer of hope that the housing crisis, the kindling for the broader financial meltdown, was hitting bottom.

The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.

Treasury officials said the action did not mean that the Fed was running short of cash but simply was a way for the government to better manage its financing needs.

Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.

A $62 billion money market fund – Primary Fund from Reserve – on Tuesday saw its holdings fall below its total deposits, a condition known as “breaking the buck” that hasn’t happened to a money market fund since 1994, Rosenberg said. Money market funds are supposed to be conservatively invested and almost as safe as cash.

Stock in Washington Mutual fell 13 percent, dropping 31 cents to $2.01 amid reports that the government was trying to find a buyer for the bank, which has been battered by bad home loans. It lost $3.3 billion in the second quarter.

Many economists worried about the unintended consequences of the Fed’s actions.

“Every time that umbrella widens, it gets heavier and heavier for those holding it up – which is the taxpayer,” said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, N.J.

Pilot reporter Tom Shean contributed to this report.

markets take a hit

The Dow Jones industrial average is now down 800 points for the week. Markets around the world also fell, with stocks dropping from Hong Kong to London. developments

Reports said Washington Mutual is seeking buyers and Wachovia is talking to Morgan Stanley about a combination .

For the first time since 1994, a money market fund saw its holdings fall below its deposits.

For the first time ever, the Treasury began selling bonds to help the Fed offset its growing borrowing needs. Another day, another headache for traders on the floor of the New York Stock Exchange. The Dow shed 449 points Wednesday.

Originally published by BY ELLEN SIMON.

(c) 2008 Virginian – Pilot. Provided by ProQuest LLC. All rights Reserved.