Lehman fallout and AIG fears sink Wall Street

Stocks slid on Monday as the bankruptcy filing by investment bank Lehman Brothers Holdings Inc and cascading fears about the stability of other major financial institutions spooked global markets.
Shares of financial services companies, including insurer American International Group, led the slide amid mounting fears about the impact of the year-long credit crisis on the economy and the profit outlook.
AIG, an insurer, and savings and loan company Washington Mutual (WM.N) are among other major companies investors fear are threatened by the credit maelstrom and may have to step up efforts to raise capital to shore up their balance sheets.
The concerns about the stability of other firms followed the U.S. government's decision not to provide guarantees for any deal to help Lehman avert bankruptcy.
"Investors are uncertain about what it means for the U.S. Treasury and the Federal Reserve to have drawn the line in the sand now and reintroduced the concept of moral hazard," said Phil Orlando, chief equity market strategist, at Federated Investors in New York. "Those who have said we're at the bottom a thousand points ago are probably smoking dope."
AIG shares tumbled 42 percent to $7 on the New York Stock Exchange, while those of Lehman plummeted 94 percent to 22 cents in composite trading. Washington Mutual dropped 13.9 percent to $2.35.
The Dow Jones industrial average fell 299.22 points, or 2.62 percent, to 11,122.77. The Standard & Poor's 500 Index declined 31.40 points, or 2.51 percent, to 1,220.30. The Nasdaq Composite Index fell 40.18 points, or 1.78 percent, to 2,221.09.
The S&P financial index was down 3.8 percent.
Lehman sought bankruptcy protection on Monday following a failed last-minute scramble to find a buyer over the weekend, weighed down by losses spawned by the U.S. mortgage crisis.
The bankruptcy petition makes Lehman the largest and highest-profile casualty of the global credit crisis that began more than a year ago.
But while the weekend scramble left Lehman with no option but to file for bankruptcy protection, Merrill Lynch, whose outlook had also come under scrutiny, agreed to be bought by Bank of America, the No. 2 U.S. bank.
Merrill shares climbed 27.6 percent to $21.75, but bank of America shares dropped 13.9 percent to $29.05.
In March the government provided financial backing for JPMorgan's (JPM.N) takeover of Bear Stearns, the first Wall Street high-flier to buckle under the credit turmoil.
The energy sector also weighed on the broader market as shares of energy companies, including Exxon Mobil fell in sync with oil prices.
Exxon Mobil shares fell 1.7 percent to $76.19 on the NYSE, while U.S. front-month crude fell $4.82 to $96.36 a barrel on the New York Mercantile Exchange. The S&P energy index fell 3.8 percent.