Market Plummets at Open

Market Plummets at Open

THE U.S. STOCK MARKET opened with a shudder as the Dow Jones industrial average fell 300 points to 11,121 and the Standard & Poor's 500 index dropped 30 points to 1,221 in early trading, led down by financial stocks such as American International Group (ticker: AIG), Bank of America (BAC) and Lehman Brothers (LEH).

So far, Wall Street doesn't appear thrilled by Bank of America's deal to buy Merrill Lynch (MER) in an all-stock deal that was valued at $50 billion based on Bank of America's stock price Friday.

Bank of America shares were down 5.28 to 28.46 in early trading, while Merrill Lynch rose 4.40 to 21.45. Merrill is trading about $3 below the current value of the Bank of America offer, apparently reflecting concerns about the fate of the deal in a tumultuous market. Investors may be concerned that Bank of America, which is still digesting its purchase of Countrywide Financial, may be taking on too much with the Merrill deal. Bank of America, whose giant loan book is hurting from a weakening economy, has a tangible equity-to-assets ratio of just 3%, half that of rival Wells Fargo. There has been speculation that Bank of America will look to raise capital soon.

American International Group, which reportedly is searching for as much as $40 billion in new equity capital, has been crunched in early trading, falling 6.26, or more than 50%, to 5.88. AIG's doesn't have a capital-raising plan in place yet and Wall Street fears downgrades by the credit-rating agencies, and that AIG's moves to raise equity capital will be enormously dilutive to existing shareholders. AIG now has about 2.6 billion outstanding shares.

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