US stocks crashed on Monday, amid the largest financial crisis in years after Lehman Brothers filed for the biggest bankruptcy in history, Bank of America said it would buy Merrill Lynch and AIG slumped on fears that it can’t raise cash. Treasury prices rallied as investors sought the comparative safety of government debt, sending the corresponding yields lower. Oil prices tumbled, falling well below $100 a barrel on slowing global economic growth. The dollar rallied versus the euro and gold prices spiked.
The DJIA closed 504 points lower at 10917.51, the biggest one day decline for the index on a points basis since Sept 17 2001, when the market reopened for trading after having been closed in the aftermath of 9/11 terrorist attacks. In a percentage basis it was the biggest decline since July 19 2002. The S&P closed 59 points lower at 1192.70 and the Nasdaq lost 81.36 points lower at 2179.91.
After the close Hewlett Packard said it will cut 24,600 jobs, or 7.5 percent of the combined workforce of HP and the recently purchased EDS. Shares were barely changed in extended hours trading.
AIG has been scrambling to raise enough cash to fend off ratings agency downgrades and stay afloat. NY Governor David Paterson said in the afternoon that AIG will be allowed to use $20bn in assets through its subsidiaries to stay afloat, basically providing itself with a bridge loan. AIG has also reportedly asked the Federal Reserve for a roughly $40bn bridge loan over the weekend. In addition, the federal government has asked Goldman Sachs and JPMorgan to lead a $70bn to $75bn lending pool for the company, the Wall Street Journal reported. Shares of AIG slumped 60.8 percent.
Losses were also tempered by the Federal Reserve's decision to loosen up its lending restrictions. The central bank could end up cutting the fed funds rate, its key overnight bank lending rate, when it meets Tuesday, analysts said. The fed funds rate currently stands at 2 percent.
Also helping Tuesday, news that a group of 10 banks including Morgan Stanley, Goldman Sachs and Barclays had given up $7bn each to create a $70bn lending pool to help smaller institutions.
Lehman announced it was filing for bankruptcy, after weekend talks aimed at saving the 158 year firm failed. The filing came shortly after midnight Monday after Bank of America and Barclays pulled out of negotiations to acquire Lehman, which has lost $60bn in bad real estate bets and the credit market's collapse. Unlike Bear Stearns, the government was reportedly not willing to help finance a takeover, bailout or restructuring of Lehman Brothers. This reportedly contributed to the reluctance of other firms to strike a deal with the troubled company. Speaking in the afternoon, Treasury Secretary Henry Paulson said that he hasn’t ruled out additional government bailouts for the future. He also said that the banking system is sound. Lehman shares plunged 94 percent.
After pulling out of the Lehman negotiations, Bank of America announced it will buy Merrill Lynch for $50bn in stock. The price values the company at more than $29 a share, a more than 70 percent premium from Merrill's closing price on Friday of $17.05. The company has posted losses of more than $17bn over the last four quarters and saw its stock plunge 27 percent last week. The stock had rallied more than 15 percent during the session Monday before ending little changed. Bank of America fell 21 percent. .
Oil prices plunged as investors continued to bet on global economic slowdown. Additionally early reports showed Hurricane Ike didn’t do as much as damage to oil rigs and refineries in the Texas Gulf region as expected. Oil prices were down $5.47 a barrel to settle at $95.71, the lowest close since February 15.
Treasury prices soared as investors poured money into the relatively safe haven. The rally sent the benchmark 10 year note tumbling to 3.39 percent from 3.72 percent.
The dollar slipped versus the euro and gained against the yen.
COMEX gold for December delivery gained $22.50 to $787 an ounce.
The Nikkei average slid 5 percent to a three year low today, with investors dumping shares across the board after the Lehman Brothers collapse fuelled fears about the US financial system and hit stock markets worldwide. Japan's top three lenders plunged with No 2 Mizuho Financial Group and Sumitomo Mitsui Financial Group losing about 10 percent, their worst daily percentage drop in nearly five years. After the holiday on Monday, investors in Tokyo came back to work to find Lehman Brothers had filed for bankruptcy and Bank of America had agreed to buy Merrill Lynch in the biggest financial shake up since the Great Depression. The Nikkei average closed 605.04 points lower to close at 11609.72, its lowest close since July 2005.
Exporters such as Canon Inc and Toyota Motor Corp also fell after the yen gained sharply against the dollar, as investors ditched oil and sought stability in the yen and high grade debt. Canon fell 10.1 percent to Y3,840, its biggest daily percentage loss in a decade and making it the second biggest drag on the Nikkei 225. The company was also hurt by a Nikkei business daily report that the firm was expected to report a 12 percent fall in group net profit for 2008, breaking an eight year run of higher earnings. It announced a share buyback worth up to Y50bn after the close of trade.
The Bank of Japan injected the money market with 1.5trn yen its biggest cash infusion in six months, via a same day operation on Tuesday to help ease jitters following the collapse of Lehman. But some said they saw buying opportunities at current levels.
UK stocks ended almost 4 percent lower on Monday as banks plunged after Lehman Brothers filed for bankruptcy protection. The FTSE100 closed 212.5 points to close at 5204.2. Media reports that AIG had asked the Federal Reserve for a lifeline added to concerns about the global financial crisis. HBOS fell 17.6 percent to 232.5 pence, to an all time low. It traded at more than 730 pence at the start of the year. HBOS is more reliant for its funding on borrowing in the wholesale market than any other major UK bank and could face higher borrowing costs as a result of Lehman's collapse. Lloyds TSB, HSBC, RBS, Standard Chartered and Barclays lost between 3.3 and 10 percent.
Also in the financial sector, Friends Provident, Prudential, Man Group and LSE fell between 5.4 and 17.9 percent. Additionally, Bank of America agreed to buy Merrill Lynch in an all stock deal worth $50bn, seeking a bargain as the world's largest retail brokerage sought refuge from fears it could be the next victim.
Energy producers fell as oil tumbled to about $96 a barrel on early signs that Hurricane Ike may have spared key Gulf Coast infrastructure, taking 47 points of the index. BP lost 3.6 percent, Royal Dutch fell 4.4 percent and BG Group lost 6.1 percent.
Miners were among the standout losers, with BHP Billiton falling 4.5 percent, Rio Tinto falling 6.6 percent and Kazakhmys 13.5 percent lower.
Among the few stocks that gained, British Airways rose 1.5 percent after Austrian newspaper Die Presse reported that Lufthansa, Air France-KLM and Russia's S7 were shortlisted for buying a stake in Austrian Airlines. The paper said British Airways did not make the list because the business plan it filed for loss making Austrian carrier was incomplete and not convincing, citing experts advising on the sale.
Utility companies also climbed as traders cited the defensive nature of the sector, with United Utilities and Scottish and Southern Energy up 0.8 and 1.3 percent respectively. A positive broker note from JP Morgan also boosted the stocks, as did a report in the Sunday Times that said Swedish power group Vattenfall has signalled out Britain as its next big target for expansion.
TUI Travel and Thomas Cook tacked on 0.4 percent and 1.9 percent respectively after the collapse of Britain's third largest tour operator privately owned XL Leisure, on Friday, reduced competition in the holiday market.