Mortgage crisis costs Dow Jones 500 points

NEW YORK - The Dow Jones Industrial Average plummeted 504.48 points today, the biggest single-day drop since the terrorist attacks of Sept. 11, 2001, and closed under 11,000 at 10,917.51 as Wall Street firm Lehman Brothers, the nation's fourth largest investment bank, filed for bankruptcy amid worries about the health of other key financial institutions.

The last time Dow Jones plummeted so precipitously was Sept. 17, 2001, the first day Wall Street markets opened following the terrorist attacks on the World Trade Center and the Pentagon.

Lehman Brothers' failure was a key to the drop. A Bank of America plan to acquire Lehman fell apart when the Federal Reserve backed off issuing a guarantee to finance the acquisition, similar to the guarantee the Fed had issued to induce J.P. Morgan Chase to purchase bankrupt Wall Street investment bank Bear Stearns in March.

Lehman, a 158-year-old firm that survived the railroad bankruptcies of the 1980s and the Great Depression of the 1930s, lost 94 percent of its market value this year and was forced into Chapter 11 after Barclays Plc and Bank of America broke off acquisition talks yesterday.

Uncertainly reigned for its tens of thousands of workers.

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But Lehman was not the only company causing alarm. In a separate deal, Bank of America moved to acquire 94-year-old Merrill Lynch for $50 billion in a deal to give the nation's largest bank Merrill Lynch's premier retail investment banking network.

Bank of America's chief executive Ken Lewis said the acquisition involves "every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, capital markets, and advisory companies," according to the Wall Street Journal.

In January, Bank of America acquired troubled mortgage company Countrywide Financial Corp. for $4 billion.

And in yet a third financial crisis today, the Federal Reserve has asked Goldman Sachs and J.P. Morgan Chase to make $70 billion-$75 billion in loans available to AIG, the nation's largest insurer, as state and federal officials scrambled to help the company come up with as much as $40 billion to help prevent a downgrading of its credit rating, an outcome that could prove fatal to the firm, according to the Wall Street Journal.

New York Gov. David Paterson confirmed that state officials are working with AIG on a plan that would allow the firm to borrow $20 billion against the assets of the firm.

As WordNetDaily's "Red Alert" subscription newsletter reported yesterday, financial markets remain uncertain how many of the nation's largest financial institutions are facing possible bankruptcy over losses in their mortgage-related portfolios.

Washington Mutual's board also fired Kerry Killinger, the bank's chairman, after 18 years of expansion from a sleepy West Coast savings and loan to the nation's largest thrift with an aggressive but poorly managed real estate financing arm.

Washington Mutual, headquartered in Seattle, has approximately $180 billion of mortgage-related loans, with a potential loss of $9 billion to $14 billion this year.

Since the collapse of the sub-prime home-loan market last year, the world's largest banks and brokerage firms have reported more than $510 billion of write-downs and credit losses on securities tied to mortgages, according to Bloomberg.

Today's shock waves that undercut Lehman, Merrill Lynch, AIG and Washington Mutual have left Wall Street experts uncertain whether the bottom of the mortgage crisis had yet been reached.

Former Federal Reserve chairman Alan Greenspan said yesterday the country is mired in a "once-in-a-century" financial crisis that is now more than likely to spark a recession, according to an Associated Press report.

In an interview with CNBC, Wilbur Ross, chairman and chief executive of W. L. Ross & Co., said he sees possibly as many as a thousand bank closures in the coming months.

Democratic presidential nominee Sen. Barack Obama took the Lehman bankruptcy as a political opportunity, charging that the upheaval on Wall Street was "the most serious financial crisis since the Great Depression" and blamed the financial woes on Republican Party economic policies supported by his Republican opponent Sen. John McCain.

McCain countered with a statement that the Wall Street turmoil underscores the need to overhaul "the outdated and ineffective patchwork quilt of regulatory oversight in Washington."

"It is essential for us to make sure that the U.S. remains the pre-eminent financial market of the world," said a statement issued by his presidential campaign. "This will be a highest priority of my administration. In order to do this, major reform must be made in Washington and on Wall Street."

 

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