NEW YORK — The optimism about the financial sector that followed the government's weekend rescue of Fannie Mae and Freddie Mac lasted all of one day.
The stock market collapsed anew Tuesday as deepening troubles at another major financial institution -- investment bank Lehman Bros. Holdings Inc. -- triggered a broad market downturn that erased most of the previous day's gains.
The Dow Jones industrial average, which shot up almost 290 points Monday, tumbled 280 points Tuesday.
Lehman's stock sank a bone-rattling 45% after talks broke off between it and a state-owned South Korean bank over a possible equity infusion into the Wall Street firm. Its shares, which peaked at $85.80 in February 2007, dropped $6.36 to $7.79.
Concerns are growing that Lehman can't find investors willing to bolster its depleted capital base, a crucial step to ensure its survival amid enormous mortgage-related losses.
"To see such a large drop in the stock tells you investors were placing a significant amount of hope in the deal going through," said Kris Niswander, associate director of financial institutions at research firm SNL Financial.
Lehman's failure thus far to secure fresh capital is prompting increasingly feverish questions about its financial sturdiness, in part because of parallels between its woes and those that plagued Bear Stearns Cos. before it was forced to accept a fire-sale takeover by JPMorgan Chase & Co. in March.
The major risk, as it was for Bear Stearns, is that other Wall Street firms might stop doing business with Lehman out of fear that it won't be able to make good on its securities trades and other financial transactions.
"The ability to trade can go away because people just head for the hills," said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.
The concerns became so acute Tuesday that Goldman Sachs Group Inc. and other firms felt an obligation to declare that they were still trading with Lehman.
Lehman is on firmer financial footing than Bear Stearns was, but the firms share eerie similarities. And after the government's intervention Sunday with Fannie Mae and Freddie Mac, which sharply reduced the value of their stocks, investors fear that anything is possible.
"We've had the two biggest financial institutions in the country just taken over," said Steven Persky, head of Dalton Investments, a Los Angeles-based hedge fund firm. "The implication is that any financial institution is vulnerable."
