• Dow: -449.36 (-4.06%)
• Nasdaq: -109.05 (-4.94%)
• S&P 500: -57.20 (-4.71%)

"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the markets reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter. Over the past year, companies including Lehman and AIG have sought to reassure investors that they weren't in trouble, and now the market isn't sure who can and can't be trusted.

"No one's going to be believing anybody now because AIG said they were OK along with everybody else," Stone said.

The two independent Wall Street investment banks left standing - Goldman Sachs Group Inc. and Morgan Stanley - remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.

"It's ugly," said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. "It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now."

The Fed said under the two-year facility the U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto payment of dividends to common preferred shareholders in the deal, which has the full support of the Treasury Department.

"The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

The Fed said the loan, secured by all assets of AIG and its primary non-regulated subsidiaries, was designed to assist the insurance giant in meeting its obligations as they come due.

The stock market has suffered one of its worst days in years as investors reacted to a stunning reshaping of the landscape of Wall Street that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

The Dow Jones industrials are down more than 504 points, their sixth-largest point drop ever and their worst showing since they lost 508 in the October 1987 crash.

Investors were shaken by Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock.

"Oh, by far," Greenspan said, when asked if the situation was the worst he had seen in his career. "There's no question that this is in the process of outstripping anything I've seen and it still is not resolved and still has a way to go and, indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system."

Appearing on ABC's This Week, Greenspan would not definitively say whether the government should come to the rescue of Lehman Brothers, which has been forced to consider a possible sale after its stock shares plunged drastically this past week. Instead he called the situation surrounding the investment bank -- and the bailout that occurred this past spring of Bear Stearns -- as a "once in a half century, probably once in a century type of event."

After 6 p.m., the formal meeting ended for the day with no resolution, though some participants stayed behind to continue talking. "Senior representatives of major financial institutions reconvened on Saturday with U.S. officials at the New York Fed. Discussions are expected to continue tomorrow," said a spokeswoman for the Federal Reserve.

At about 8 p.m., New York Fed President Timothy Geithner was still at the bank's headquarters. Officials from the New York Fed and various banks were expected to continue working through the night.

Under one plan, either Barclays PLC or Bank of America Corp. would buy Lehman's "good assets", such as its equities business, people familiar with the matter say. Lehman's more toxic, real-estate assets would be ring-fenced into a "bad" bank that would contain about $85 billion in souring assets. Other Wall Street firms would try to inject some capital into the bad bank to keep it afloat for a period of time so that a flood of bad assets don't deluge the market, damaging the value of similar assets held by other banks and insurers. The banks are also looking for the government to somehow financially backstop the bad bank.

"They are a company with fundamental problems that is getting the worst of the brunt of the market," said Jaime Peters, an analyst with Morningstar in Chicago. "That is scary because finance is all about confidence. "

The worst-case scenario would be WaMu failing - or coming to the brink, if Uncle Sam swooped to the rescue a la Bear Stearns. A collapse of the nation's largest S&L would be devastating. But Peters and others said they don't think the situation is that dire yet.

While WaMu has appeared troubled for months - its shares have plunged more 90 percent over the past year - recent events have brought it to the forefront of Wall Street's concerns. Since Monday, the stock price has been halved. On Wednesday it closed at $2.32 a share, down 98 cents or 30 percent.

The 98-cent a share loss, leaving the stock at $2.32 a share, came after drops of 82 cents a share Tuesday and 15 cents a share Monday, all following the naming of a new chief executive and disclosure of an agreement with federal regulators calling for a new business plan.

News service reports attributed the fall to factors such as Standard & Poor's lowering its credit outlook on the company from stable to negative, speculation that accounting rule changes will discourage potential buyers, the Office of Thrift Supervision order, and Lehman Brothers' $4 billion loss and plan to sell all or parts of the company

Shares began falling after a Dow Jones Newswires report that the chairman of South Korea's top securities regulator, Jun Kwang-woo, had said talks between Lehman and KDB had ended. A spokesman for the regulator denied the report, telling Reuters that Jun never made any such declaration.

The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.

"The market fears that no one will inject capital in the company," said Nick Kalivas, equity market analyst at MF Global Research in Chicago.

In afternoon trading, Lehman shares were down $5.95, or 42 percent, at $8.20 on the New York Stock Exchange.

The slide wiped out more than $4 billion of market value, based on reported shares outstanding, and was a factor in broad declines in major U.S. stock indexes. Prices of safe-haven U.S. Treasuries rose. Lehman shares touched their lowest level since October 1998, Reuters data show.

Federal Deposit Insurance Corp. data released Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

The FDIC also said that federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.

"Quite frankly, the results were pretty dismal," FDIC Chairman Sheila Bair said at a news conference, but they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets.

The majority of U.S. banks "will be able to weather" the economic and housing storms, with 98 percent of them still holding adequate capital by the regulators' standards, Bair said.

Investors seemed unimpressed by a statement from Treasury Secretary Henry Paulson, who said the government's focus is ensuring that Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission.

The government-chartered companies at times each lost more than 40 percent on growing speculation that a government bailout is needed. A collapse of the two financiers would cause further shock to the financial system, and trigger more losses to banks and brokerages with significant holdings of mortgage-backed securities.

The troubles at Fannie Mae and Freddie Mac are just the latest depressing turn in a year-old credit crisis that shows no sign of ending, disappointing stock traders who just months ago who thought the worst was perhaps over.

"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation," the BIS said in its annual report.

"While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

The Basel-based bank added that the current "consensus view is still that the global economy will slow only modestly further in 2008" and that growth continued to be strong in the euro zone, Japan, and major emerging market economies.

Often called the central bank of central banks, the BIS said during its last fiscal year central banks worldwide reacted to the financial and monetary policy situation differently, and that given their countries' different economic situations, a "one size fits all" monetary policy can't necessarily be predicted or suggested.

The bank said that with inflation rising, a global bias toward higher interest rates was probably appropriate. Higher interest rates can cool inflation, but run the risk of lower growth.

"Between inflation and the liquidity crisis, this is one of the toughest markets I've seen," said Dreman, who oversees about $15 billion in Jersey City, New Jersey. "But it's not a market you sell into. Any losses you take by being too early will be more than offset by buying cheaply."

he Dow Industrials rose 187.32 to 12,548.64. The S&P 500 gained 20.37 to 1349.88. The Nasdaq surged 68.64 to 2326.75.

JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $240 million, about 90 percent less than its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the New York-based companies said in a statement late yesterday. The Federal Reserve is providing financial backing to JPMorgan, the second-biggest U.S. bank, and also cut the rate on direct loans to banks in its first emergency weekend action in almost three decades to stave off a broader market panic.

President Bush rushed to strike a note of calm to the turbulent situation on Monday morning, hailing the Fed's action and saying: "We've taken strong decisive action." The president spoke after meeting at the White House with Treasury Secretary Henry Paulson and other members of his economic team. "We're in challenging times," Bush said.

The mortgage foreclosure crisis has caused a drop in cities' revenues, a spike in crime, more homelessness and an increase in vacant properties, a survey of elected local officials out today shows.

About two-thirds of 211 officials surveyed by the National League of Cities reported an increase in foreclosures in their cities in the past year, according to the online and e-mail questionnaire. A third of them reported a drop in revenues and an increase in abandoned and vacant properties and urban blight.

"There's a reduction in revenues at the same time that more services are needed," says Cynthia McCollum, president of the National League of Cities and councilwoman in Madison, Ala., a suburb of Huntsville. "Because of foreclosures, people are stealing, crime is on the rise and we don't have more money for cops on the street."

Bernanke, testifying before Congress, said that while the large U.S. banks will likely recover from the recent credit crisis, others could fail.

"Implying that some banks may fail stirs concerns for any investor who's familiar with financial and economic history," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. "Investors have been very edgy about credit market conditions and banks' financial conditions. Very edgy. And this doesn't remove that edginess."

Earlier, stocks had fallen in response to a Labor Department report that first-time unemployment claims rose last week by 19,000 to 373,000, the highest level since late January.

Scott Wren, equity strategist for A.G. Edwards & Sons, said he still believes there's less than a 50 percent chance of a recession, but that it's clear employers are cautious about hiring.

"To consistently see claims up near 400,000, that's pretty telling often-times of a recession," he said.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse dealt the economy its biggest blow last year. Builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

"The economy has been subject to something of the perfect storm here. It has been hit by the housing slump the credit squeeze, the subprime slime and stock price declines on Wall Street," said economist Ken Mayland, president of ClearView Economics. "The economy is weathering some pretty stormy seas but it is weak."

The fourth-quarter's performance was much weaker -- half the pace -- than economists were expecting. They were forecasting growth to clock in a 1.2 percent pace.

The 0.6 percent annualized increase in gross domestic product (GDP) marked a big loss of momentum from the third quarter's brisk, 4.9 percent showing. The fourth-quarter pace was the slowest since the first quarter of last year.

"The GDP hit stall speed," wrote Joseph Brusuelas, chief U.S. economist at IDEAglobal.

GDP hadn't been any slower since the end of 2002, when the economy was struggling to recover from the recession a year earlier.

The purchase marks another acquisition for Bank of America Chief Executive Kenneth Lewis, who has spent more than $100 billion since 2004 to create the second-largest U.S. bank and the nation's largest consumer bank.

It also provide's a lifeline for Countrywide, which became a poster child for what critics say were lending excesses that fueled the housing and credit meltdown.

The largest U.S. mortgage lender has been convulsed by mounting losses and defaults, a loss of access to credit markets, and a slew of lawsuits and regulatory probes into its lending practices and Chief Executive Angelo Mozilo's pay. On Tuesday, it denied rumors that it might go bankrupt.

By agreeing to purchasing a $7.5 billion stake in the faltering banking giant Citigroup, the secretive, government-controlled Abu Dhabi Investment Authority is breaking with tradition.

As the largest sovereign wealth fund in the world, with assets estimated at $650 billion, it poured money in the past into low-return, low-profile investments or small emerging market deals, unlike its flashy emirate neighbor, Dubai.

But a falling dollar and a growing cash pile are spurring Abu Dhabi to change strategy, according to analysts, economists and deal makers, who said that more big-ticket deals might be ahead.

Flush with cash from its oil exports, Abu Dhabi turned to Wall Street, using a complicated transaction late Monday to buy 4.9 percent of Citigroup, acquiring high-yield, convertible stock that must be exchanged for common stock between March 2010 and September 2011.

There was a 93% jump in filings for repossessions on the same month a year ago, and a 9% rise on June's figure, property firm RealtyTrac said.

The mortgage industry has been hammered by rising default payments.

Separate data showed a surge in job losses in the construction sector and among real estate firms, largely prompted by the slump.

Falling sales and decreasing prices have made it harder for homeowners who have hit difficulties to sell their homes and clear their debts.

The RealtyTrac data showed there were 179,599 foreclosure - or repossession - filings in July. This equates to one for every 693 households.