With Wall Street already reeling from the demise of one storied investment firm and the rushed takeover of another, investors are bracing for more turbulence as the housing crisis continues to hammer the nation's financial system.
The Dow Jones industrial average plummeted 504 points Monday -- the most since the aftermath of the Sept. 11, 2001, attacks -- after investment bank Lehman Bros. Holdings Inc. became the biggest company to file for bankruptcy protection and Bank of America Corp. announced it was acquiring Merrill Lynch & Co.
The market's direction today could hinge in large part on what happens with insurer American International Group Inc. -- the latest financial titan struggling to stay afloat -- and on the outcome of a Federal Reserve meeting on interest rates.
Like Lehman and Merrill, AIG has recorded large losses on mortgage-related debt. Its stock price plummeted 61% on Monday as the company scrambled to borrow as much as $75 billion to tide it over.
And, as with Lehman, investors fear that a collapse of AIG would ricochet through the financial system and prompt another wave of selling in the stock market.
"You could crater the market on Tuesday with no resolution of AIG," said Joe Battipaglia, market strategist at brokerage Stifel, Nicolaus & Co. in Florham Park, N.J.
The Fed, meanwhile, is under increasing pressure to come to Wall Street's aid by cutting interest rates, a move that only a few days ago seemed a remote possibility.
The depth of the crisis had analysts making comparisons to the aftermath of 9/11, the dot-com bust and the 1987 market crash -- if they were making comparisons at all.
"There's unprecedented turmoil among the largest financial institutions in the country, and that predictably has everyone on edge," said Jeffrey Bronchick, chief investment officer at Reed Conner & Birdwell in Los Angeles. "No one has seen this before, and it's going to take some time to see how it plays out."
The Dow ended the day down 504.48 points, or 4.4%, at 10,917.51. It was the worst one-session point drop since the blue-chip index plunged 685 points, or 7.1%, on Sept. 17, 2001 -- the day markets reopened after the terrorist attacks. It was the biggest one-day percentage decline since a 6.4% plunge in July 2002.
Stock prices also tumbled in Asia and Europe, and were down again in Asia early today.
