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Biggest Stock Market Fall Since 9/11

Updated on September 15, 2008

Biggest Stock Market Fall Since 9/11

US stocks plunged to new bear-market lows overnight and the Dow Jones Industrial Average had its biggest point-decline since the September 11 terrorist attacks.

The shock of Lehman Brothers’ failure and Merrill Lynch's rushed merger raised fears about other distressed financial firms, including American International Group and Washington Mutual.

After steadying at mid-session, Wall Street stocks took a late dive, suggesting the negative momentum may carry through to markets not yet open in Asia and Europe.

In a vicious cycle, fears about firms' capital position weighed on shares, and the decline of the shares' value made it difficult to raise capital.

Anthony Conroy, head of US equity trading at BNY ConvergEx, said: "This is unprecedented.

“The Wall Street we knew is gone,” he said, adding that both the degree and pace of change were staggering.

Shares of AIG, the giant insurer, fell 61 per cent as investors worried that its exposure to mortgage-linked derivatives would make it the next domino to fall in the credit crisis.

The US Government asked JPMorgan Chase and Goldman Sachs to form a consortium of lenders and extend $US70-75 billion in loans to AIG.

U.S. financial crisis deepened as Lehman Brothers filed for bankruptcy protection, AIG faces a severe credit test and liquidity crunch and Merrill Lynch was forced to sell the company to Bank of America. The Fed and the U.S. Treasury are finally sending clear signals to financial markets and allowed Lehman to fall. Once unthinkable, talks of AIG bankruptcy intensifed ahead of the Fed rate decision tomorrow. AIG may need to raise as much as $75 billion in the short term.

5:00PM New York, 11:00PM Frankfurt, 7:00AM Sydney– The U.S. financial crisis broadened as Lehman Brothers filed bankruptcy protection and AIG plunged 60%.

Global Markets

The U.S. financial landscape was drastically altered over the weekend as the credit crisis deepens. The slow motion crisis finally engulfed Lehman Brothers as it filed for bankruptcy. Merrill Lynch was forced to sell the company to Bank of America at a substantial discount. AIG hunts for cash but may come up empty handed as international investors stay away from the U.S. companies. European markets fell between 4% and 5% and few Asian markets that were open on Monday dropped 4%.

AIG (AIG: chart) is facing a severe credit test and liquidity crunch as investors shy away from providing additional capital to the largest insurance company in the world by asset. The insurer with more than $1 trillion of balance sheet asset may face a rating downgrade on several of its mortgage related assets. AIG was permitted by the New York State Governor Patterson to seek $20 billion from its own subsidiaries and may have to $20 billion of assets. The insurer may still need another $30 billion to shore its capital base.

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