Wall Street Tumbles
The stock market loses over 500 points on news of the failure of two large financial institutions
Specialist Henry Becker, left, directs trading at the post that handles AIG on the floor of the New York Stock Exchange, Tuesday Sept. 16, 2008. (Photo:©Richard Drew/AP Images)
Stocks plummeted on Monday amid the worst crisis to hit Wall Street in years. Nervous investors sent the Dow Jones Industrial Average tumbling 504 points, or 4.4 percent. The Dow Jones is commonly used as an indicator of changes in the prices of stocks from the 30 largest companies in the United States. If a company's stock price is high, that means the company is doing well.
"It was an ugly day," said James King, president and chief investment officer at National Penn Investors Trust Company. "Investor confidence is at the lowest point we've seen in a while."
Monday's monumental drop is the largest single-day loss for the Dow since September 17, 2001—the day the market reopened after its shutdown in the wake of the 9/11 terrorist attacks.
The market opened Monday morning after a weekend of bad financial news that centered around two of Wall Street's most respected firms—Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
Shortly after midnight Monday, Lehman Brothers announced it was filing for bankruptcy. Lehman had lost $60 billion in poor real-estate investments and the failure of the credit market.
Executives at the 158-year-old firm tried selling parts of the company to other companies. But hopes of saving Lehman Brothers faded late Sunday night after talks collapsed with Bank of America and Barclays.
Bank of America did strike a deal with another Wall Street institution over the weekend, however.
On Sunday night, it announced that it would acquire Merrill Lynch for $50 billion in stock. Like Lehman, Merrill Lynch has seen its financial fortunes take a turn for the worse. The company has lost $17 billion over the past year. Last week alone, Merrill Lynch stock fell by 27 percent.
Monday's gloomy news on Wall Street comes just one week after the U.S. government rescued mortgage lenders Fannie Mae and Freddie Mac from bankruptcy.
Attention is now on American International Group (AIG), the nation's largest insurance company. AIG has lost more than $18 billion in the last nine months, and its credit rating was downgraded sharply Monday night. A company's credit rating is a guide for investors to judge the strength of a company.
Emergency Fund Created
In an effort to avoid further market meltdown, the Federal Reserve announced Sunday that it would relax its lending restrictions on the banking industry.
A group of 10 top national and foreign banks have also agreed to pool together $70 billion to lend to troubled financial institutions. Those banks include Goldman Sachs, Citigroup, Barclays, and Morgan Stanley.
Still, the future of America's financial institutions remains uncertain. Jim Dunigan, chief investment officer at PNC Advisors, refused to speculate about when the market might turn around.
"You have to throw out the history books because there's really nothing to compare this to," said Dunigan. "We've never witnessed this before. There's no road map for this."
That sense of the unknown isn't only being felt in America. On Tuesday, the effects of Wall Street's "Black Monday" were felt around the world.
Tokyo's stock market, the largest in Asia, saw the benchmark index Nikkei 225 dropped 4.95, a three-year low. Another index, Topix, dropped 5.07 percent. Other markets in Asia and across Europe felt similar losses.
"The United States is in trouble, so [investors] think everywhere else is also in trouble," Kiichi Fujita, a strategist at Nomura Securities in Japan, told The New York Times. "This sell-off won't stop until foreigners stop panicking."
When the New York Stock Exchange opened Tuesday, the Dow fell another 100 points before leveling off. The value of AIG's stock, however, continued its freefall, losing another 60 percent of its value Tuesday.
TELL US WHAT YOU THINK
Read today’s story and answer the following question.
|The government has already stepped in to help two failing financial institutions, Fannie Mae and Freddie Mac. Should the government do more to help other companies that are failing? If you were President, how would you handle the problems in the economy?|
Tell us what you think on the Scholastic News Online Blog!
ECONOMY FOR KIDS
Learn more about the economy and how it works in this special report.
Get the latest on national and international events, movies, television, music, sports, and more from Scholastic News Online.
Karen Fanning is a contributing writer for Scholastic News Online.