Global stocks tumbled, with Wall Street marking its worst day since markets reopened after the attacks of September 11, 2001, and crude oil prices plunged on Monday as Lehman Brothers' bankruptcy filing caused investors to bail out of risky assets. Investors piled into traditional safe-havens, sending the US 30-year Treasury bond yield to its lowest level in 45 years.
The Dow industrials slumped more than 500 points to post their biggest one-day percentage loss since July 2002, while the S&P posted its worst one-day percentage loss since September 2001. Stocks in Europe, Asia and South America also plunged on the Lehman news and as Bank of America's weekend agreement to buy Merrill Lynch stirred concerns about mounting global economic problems. The dollar slumped on the wide aversion to risk, posting its biggest one-day drop against the yen in nine years.
European shares slid to their lowest close in two months. Most major Asian markets were closed for a holiday, but stocks fell heavily on open markets. Shares of financial services companies plunged on concerns about the impact of the credit crisis on their profit outlooks and the broader economy. Such worries also led to the view that energy demand would slow further, dragging down oil prices.
New York crude prices fell by $5.47 to settle at $95.71, after earlier hitting a seven-month low of $94.13 a barrel. The Dow Jones industrial average closed down 504.48 points, or 4.42 percent, at 10,917.51. The Standard & Poor's 500 Index lost 58.06 points, or 4.64 percent, at 1,193.64. The Nasdaq Composite Index shed 81.36 points, or 3.60 percent, at 2,179.91.
"The turmoil continues," said Robert Francello, head of equity trading for Apex Capital hedge fund in San Francisco. "And it seems to be people underestimated the impact of AIG and what the fallout of that could be." Shares of Lehman plunged almost 95 percent in composite trade. American International Group plummeted about 50 percent as investors grew increasingly wary after the insurer, once the world's most valuable insurer by market value, failed to deliver a rescue plan.
Lehman, weighed by losses spawned by the US mortgage crisis, sought bankruptcy protection on Monday following a failed last-minute scramble to find a buyer over the weekend. Adding to investor worries was a report that AIG had asked the Federal Reserve for a $40 billion bridge loan.
AIG shares closed at $4.76 after falling as low as $3.50 during the session. The Standard & Poor's 500 Index broke through the psychological barrier of 1,200 set on July 15 when markets were gripped by a previous bout of fear. Institutional investors are waiting to see what happens to AIG if the Federal Reserve cuts interest rates at its policy-setting meeting on Tuesday and if a European bank is hit by the resurgent credit crisis, traders said.
"There's a lot of cash on the sidelines and they're waiting to put it into use but there's no impetus for them to do it," said Edward Craig, head of US cash equities trading at Jefferies & Co in New York.
In Europe, financial stocks weighed heavily on markets. The FTSEurofirst 300 index of top European shares ended with a loss of 3.63 percent at 1,119.94 points, its lowest close since July 16. Falling stocks led gainers by about 10-to-one, according to Reuters data. HBOS, Britain's largest mortgage lender, plunged 17.6 percent, UBS fell 14.5 percent and the Royal Bank of Scotland 10 percent.
A steep fall in crude oil prices hit index heavyweight energy stocks such as Total, down 5 percent, and Royal Dutch Shell, off 4.4 percent. Oil plunged as much as $7 per barrel as investors sought safer havens and on early signs that Hurricane Ike had spared key US energy infrastructure along the Gulf of Mexico.
"It has been quite a spectacular turn of events at Lehman and Merrill and the stresses in the financial system are sparking concerns about economic outlook and how that will weigh on global energy demand," said David Moore, commodities strategist for Commonwealth Bank of Australia.
In currency markets, the dollar had managed to hold gains against the euro for most of the New York session but as US benchmark indexes fell more than 3 percent in late New York trading, the US currency fell in its wake.
The dollar fell 2.8 percent to 104.92 yen in late New York trading, the biggest one-day drop against the yen since August, 1999, according to Reuters data. The euro rose 0.6 percent to $1.4308, though it remained off the session high of $1.4479. The high-yielding Australian and New Zealand currencies fell sharply versus both the dollar and the Japanese yen.
Seen also as a safe-haven, the Swiss franc rose against the dollar, which fell 0.8 percent to 1.1203 francs. Deep fears about the unfolding US banking crisis drove up demand for US Treasury bills and pushed down yields, which move in the opposite direction to prices, on an intense flight-to-safety bid into ultra-short-term government paper.
The price of benchmark 10-year US Treasury notes jumped 2 points, a rare gain for longer-dated debt. The yield on the 30-year Treasury bond fell below 4.10 percent for the first time since 1963. "People are really scared. They don't trust many companies. They don't know how safe their money is," said Charles Zhang, managing partner at Zhang Financial in Portage, Michigan.
The price on two-year Treasury notes, most sensitive to the market's Fed policy outlook, was up 26/32 at 101-3/32. The yield fell to 1.80 percent, down 42 basis points from Friday. The single-day drop in two-year yields was the biggest since the market session right after the September 11, 2001, attacks. Gold futures ended 2.9 percent higher in volatile trade. Gold contracts for December settled up $22.50 at $787.00 an ounce in New York.