US stocks dropped to a three-year low on Wednesday as the US rescue of insurer AIG failed to calm a crisis of confidence in global markets and banks were scared to lend to each other. The Dow fell almost 450 points and the Nasdaq fell nearly 5 percent in its worst day since the aftermath of the September 11 attacks in 2001 as rattled investors worried about who could be the next victim of the global credit crisis.
Of the two remaining major investment banks, Goldman Sachs stock suffered its biggest one-day drop ever. Morgan Stanley stock had its worst day in at least 15 years as investors worried whether it would survive as an independent investment bank in the current environment, after Lehman Brothers Holdings went bankrupt and Merrill Lynch was forced to sell itself this weekend.
"The fear is, 'Who is next?'" said John O'Brien, senior vice president at MKM Partners LLC in Cleveland. "It almost feels like people scour the books and say, 'Who is the next likely target that we can put a short on?' and that spreads continuous fear."
After the closing bell, reports on deal making among financial companies picked up pace. Morgan Stanley was discussing a merger with regional banking powerhouse Wachovia, the New York Times reported. And sources told Reuters that Washington Mutual, the country's largest savings bank, put itself up for sale.
The Dow Jones industrial average fell 449.36 points, or 4.06 percent, to 10,609.66, its lowest level since November 2005. It was the blue chip Dow average's biggest percentage drop since Monday, when it fell 504.48 points, or 4.42 percent, the most since the aftermath of 9/11.
The S&P 500 fell 57.20 points, or 4.71 percent, to 1,156.39, its lowest level since May 2005 and its biggest percentage drop since September 17, 2001, when the markets reopened after the September 11 attacks. The Nasdaq also fell the most since September 17, 2001. It shed 109.05 points, or 4.94 percent, to 2,098.85, its lowest level since August 2006.
Goldman Sachs shares fell 13.9 percent to $114.50 and, at one point, fell below $100 for the first time in more than three years. Morgan Stanley shares fell 24.2 percent to $21.75.
The White House defended government actions to shore up troubled insurance company American International Group Inc, saying it was to prevent broader harm and noting it was "concerned about other companies." AIG is one of the 30 companies whose stocks make up the blue chip Dow average. The drop in Morgan Stanley's shares came despite the bank's posting quarterly results that beat Wall Street's estimates.
Banks frantically seeking dollar funds have been stonewalled by others increasingly reluctant to lend amid uncertainty and nervousness following the collapse of Lehman Brothers and the bailout of AIG. The US Securities and Exchange Commission issued new rules governing the conduct of people who profit from stock declines as shares of major financial institutions plummeted on fears of a global credit crunch.
The three SEC rules cover shares of all publicly traded companies and follow a brief emergency rule this summer that was aimed at curbing illegal short selling in 19 major financial stocks.
Trading was heavy on the New York Stock Exchange, with about 2.14 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion, while on the Nasdaq, about 3.12 billion shares traded, also trumping last year's daily average of 2.17 billion. Declining stocks outnumbered advancing ones by 15 to 1 on the NYSE and on the Nasdaq, by 6 to 1.