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FINANCIAL SYSTEM IN CRISIS / MARKETS

Dow plunges a record 777

September 30, 2008|Walter Hamilton and Martin Zimmerman | Times Staff Writers

NEW YORK — The stock market on Monday suffered its most devastating collapse since the 1987 crash as shellshocked investors dumped shares en masse after the House voted down a proposed $700-billion rescue of the financial system.

The unexpected defeat of the bailout package fanned fears that the most debilitating financial crisis since the Great Depression could intensify.

The Dow Jones industrial average sank 777 points -- the largest point drop in its 112-year history. The Standard & Poor's 500 index plunged 8.8%, its sharpest decline since Black Monday two decades ago, while the Nasdaq composite index plummeted 9.1%.

The tense credit markets tightened further as anxiety-ridden investors rushed into super-safe Treasury securities, pushing their yields down.

"The financial markets are in panic," said John Spinello, a Treasury market strategist at Jefferies Group Inc. in New York. "And until politicians realize that, and until Main Street America realizes that it's not a Wall Street problem -- it's a Wall Street and a Main Street problem -- the financial markets are going to be volatile and the decline is going to be hard to arrest."

The flight to U.S. government securities, along with news of several major bank bailouts in Europe, boosted the value of the dollar against most major currencies.

Prices of oil and other commodities, already down early Monday on fresh concern about the global economy, accelerated their slides after the House vote. Crude futures tumbled $10.52, or 9.8%, to $96.37.

The day began with global stock markets falling on the new signs of financial stress in Europe and fears that the rescue package wouldn't quickly ease a logjam in the credit markets or stave off a deep economic downturn.

Many investors say the bailout, despite its potential shortcomings, is necessary and would help restore tattered confidence in the financial system.

"The last thing the market needed was another dose of uncertainty, and that's what we got in spades," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.

The credit markets have congealed in the last two weeks, with loss-ridden banks hoarding cash and refusing to lend to one another or to other companies. That poses an enormous risk to the economy as businesses of all sizes have trouble raising cash to meet payrolls, build inventory or expand their operations.

Conditions deteriorated further Monday as rates soared on short-term loans between banks.

The angst was evident as well in the government securities market as the yield on three-month Treasury bills, among the safest investments, fell to a paltry 0.35% from 0.85% on Friday. That showed investors were gladly accepting almost no return on their money to assure themselves that it would be returned to them.

Though many expect the bailout to pass in some form, the dickering on Capitol Hill was taken as a sign that legislators don't appreciate the magnitude of the threat looming over Wall Street.

"Some of these financial companies are on deathwatch," said Kevin Kruszenski, director of trading at KeyBanc Capital Markets in Cleveland. "They need this plan."

Indeed, the bailout rejection came on a day when investors already were spooked by new woes at banks across the globe.

Wachovia Corp. became the second large bank in less than three business days to fall victim to the mortgage crisis, when it acquiesced early Monday to a government-brokered buyout by Citigroup Inc. Washington Mutual Inc. was seized late Thursday by the government and immediately sold to JPMorgan Chase & Co.

Three European governments pumped more than $16 billion into Fortis, a beleaguered banking company based in Belgium and the Netherlands. And Britain seized Bradford & Bingley, a large mortgage lender.

The Federal Reserve pumped additional cash into the financial markets to relieve strains overseas.

On Wall Street, the selling was vicious as all 10 industry groups in the S&P 500 were pummeled.

The Dow fell 777.68 points, or 7%, to 10,365.45, a nearly three-year low. The S&P 500 dropped 106.59 points to 1,106.42, its lowest level since October 2004. The Nasdaq tumbled 199.61 points to 1,983.73.

Financial stocks skidded almost 16%, energy stocks sank 11% and technology shares lost 9.2% as investors concluded that a weaker global economy would depress demand for tech products.

The Dow is down 27% from its all-time high, hit almost a year ago. With one day to go this month, the blue chips have lost 10% in September.

"It's been a very painful month," said Keith Wirtz, chief investment officer at Fifth Third Asset Management in Cincinnati. "I've been doing this for going on 28 years, and I've never had as much anxiousness around the financial system."

Investors are now conditioned to pin their hopes on a government bailout, Wirtz said.

"The market wants to have some sense that some action is being taken," he said. "It wants to see something moving forward. The psychology right now is so fragile."

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