By Lynn Thomasson and Elizabeth Stanton
Sept. 15 (Bloomberg) -- U.S. stocks tumbled, pushing the Standard & Poor's 500 Index to the steepest drop since the September 2001 terrorist attacks, as Lehman Brothers Holdings Inc.'s bankruptcy and declining commodities increased speculation that credit-market losses and the economic slowdown will worsen.
Stocks erased more than $600 billion in value as financial shares in the S&P 500 decreased the most since at least 1989, according to data compiled by Bloomberg. American International Group Inc. sank 61 percent and Washington Mutual Inc. decreased 27 percent. Concern the U.S. is heading for a recession pushed oil lower, prompting a drop in energy stocks, and sent General Electric Co. down 8 percent.
``Fear is in charge,'' said Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $70 billion. ``This blows another hole in the banking system's ability to extend credit.''
The S&P 500 declined 59 points, or 4.7 percent, to 1,192.70, the lowest level since October 2005. The Dow Jones Industrial Average tumbled 504.48, or 4.4 percent, to 10,917.51. The MSCI World Index of developed-market equities slumped the most in six years while the 7.6 percent drop in Brazil's Bovespa was the steepest since Sept. 11, 2001. The dollar weakened the most against the yen in a decade and two-year Treasury notes surged.
More than 24 stocks slipped for each that rose on the New York Stock Exchange on concern financial shares will continue their slump. The S&P 500 has fallen 23 percent since an October record as bank losses from the first nationwide decline in U.S. home values since the Great Depression reached $514.6 billion.
`Remember Where You Were?'
``It really goes to the heart of the financial system,'' said Stephen Wood, who helps oversee $213 billion as senior portfolio strategist at Russell Investment Group in New York. ``It'll be one of those days where people say in 10 years, `Do you remember where you were?'''
The Dow average pared its decline by half at midday in New York after plunging more than 330 points in the first 30 minutes of trading. Losses accelerated at 2 p.m. when Treasury Secretary Henry Paulson said the U.S. wasn't considering a ``bridge loan'' to bail out AIG.
GE, which makes power-plant turbines and jet engines and offers commercial loans, retreated $2.15 to a five-year low of $24.60. The company may miss profit estimates because of credit- market turmoil, according to Citigroup Inc.
Caterpillar Inc., the world's largest maker of construction equipment, fell 3.4 percent to $63.21. AK Steel Holding Corp. slumped 19 percent to $31.82.
Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 24 percent to 31.70, the highest since the March bailout of Bear Stearns Cos. The VIX measures the cost of using options as insurance against declines in the S&P 500.
``We need to get to the bottom of the credit crisis before financials are the sort of place that we want to put a lot of money,'' said Bruce McCain, the Cleveland-based chief investment strategist at Key Private Bank, which oversees about $30 billion.
Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Lehman sank 94 percent to 21 cents.
Citigroup Inc., the largest U.S. bank by assets, declined 15 percent to $15.24 for the steepest drop since July 2002. Bank of America retreated 21 percent, the most since at least July 1982, to $26.55 after agreeing to purchase Lehman rival Merrill Lynch & Co. for $50 billion. American Express Co., the biggest U.S. credit card company by purchases, fell 8.9 percent to $35.48.
`Down The Drain'
``It's all basically going down the drain,'' said Franz Wenzel, who helps oversee about $830 billion as deputy director for investment strategy at Axa Investment Managers in Paris. ``The rhythm of the shoes that drop has accelerated. That's what we follow with caution.''
AIG lost $7.38 to $4.76, the lowest price since June 1988. The biggest U.S. insurer fell after failing to present a plan to raise capital and stave off credit downgrades. AIG may need to raise $20 billion in capital and sell $20 billion of assets to ease a cash crunch brought on by the collapse of U.S. mortgage markets, people familiar with insurer's plans said.
Goldman Sachs Group Inc. fell 12 percent, the most since April 2000, to $135.50. JPMorgan Chase & Co. retreated 10 percent to $37. Their shares were downgraded by Merrill Lynch.
Goldman Sachs was cut to ``neutral'' on the likelihood Lehman's bankruptcy will reduce profitability for the biggest U.S. securities firm. The analysts cut their recommendation on JPMorgan to ``underperform'' and predicted the lender will report a third-quarter loss.
Morgan Stanley, the biggest U.S. securities firm other than Goldman Sachs, fell 14 percent to $32.19.
Betting Against Financials
The Financial Select Sector SPDR Fund, an exchange-traded fund linked to financial companies, had 42.6 million shares on loan on Sept. 11, or 87 percent more than a week earlier, according to Alexander Hofmann, an analyst at Data Explorers in London. Shares on loan can be an indication of short positions.
Former Fed Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.
``There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview yesterday on ABC's ``This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.
Washington Mutual retreated 27 percent to $2, the lowest price since October 1990. The company may cost taxpayers as much as $24 billion in the event of a U.S. government bailout, said Richard Bove, an analyst at Ladenburg Thalmann & Co. After the close of exchanges, Standard & Poor's lowered the bank's credit rating to junk because of the deteriorating housing market.
``You may get an assisted merger with a limit on how much the private buyer would pay for the bank with the government giving a guarantee for the rest,'' Bove said in an interview with Bloomberg Radio.
Some investors said Lehman's failure may allow financial markets to rebound.
``The air will be clean within the next one month and we can get a fairly good rebound starting from the middle of October until the spring of next year,'' Gloom, Boom & Doom Report publisher Marc Faber said in a Bloomberg Television interview from Thailand.
Merrill climbed 0.1 percent to $17.06, almost fully erasing a 33 percent surge. Bank of America, the biggest U.S. consumer bank, agreed to buy the company in a stock transaction now valued at $22.82 a share as the credit crisis claimed another of America's oldest financial institutions.
The U.S. Securities and Exchange Commission will likely stiffen rules targeting manipulative short selling, a person familiar with the matter said.
The SEC may strengthen rules this week by requiring brokers to deliver shares that have been sold short, according to the person, who declined to be identified because the plans aren't complete. The SEC also will consider it securities fraud when short sellers deceive brokers about their intention to deliver shares to buyers, the person said.
The S&P 500 Energy Index lost 6.9 percent. Chevron Corp. fell 4.9 percent to $80.09, and Valero Energy Corp. decreased 13 percent to $31.19.
Crude oil plunged 5.4 percent to $95.71 a barrel in New York as refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.
Stocks pared their losses during the first 1 1/2 hours of trading, led by gains in consumer companies including Procter & Gamble Co. and McDonald's Corp., on speculation the Federal Reserve will reduce rates tomorrow. Traders in futures contracts gave 60 percent odds the Fed will shift its target for overnight loans between banks to 1.75 percent from 2 percent.
European and Asian stocks slumped on concern turmoil in the U.S. banking industry will infect financial institutions and economies abroad. The MSCI World Index lost 3.6 percent to 1,236.90, a three-year low, as of 4:33 p.m. in New York.
Europe's Dow Jones Stoxx 600 Index retreated 3.5 percent to 270.68 for the biggest decline since March 17. The MSCI Asia Pacific excluding Japan Index slipped 1.9 percent to 347.26, the lowest since October 2006. Markets in Japan, South Korea, Hong Kong and China were closed for holidays.