Business

NEW YORK (CBS) ― Wall Street plunged again in a crisis of confidence Wednesday as anxieties about the financial system still ran high after the government's bailout of insurer American International Group Inc. The Dow Jones industrial average dropped 449 points, and investors seeking the safety of hard assets and government debt sent gold, oil and short-term Treasurys soaring.

The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company after it lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy. The ramifications of the world's largest insurer going under likely would have far surpassed the demise of Lehman.

"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the markets reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter. Over the past year, companies including Lehman and AIG have sought to reassure investors that they weren't in trouble, and now the market isn't sure who can and can't be trusted.

"No one's going to be believing anybody now because AIG said they were OK along with everybody else," Stone said.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.

Lehman filed for bankruptcy protection on Monday, and by late Tuesday had sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, for the bargain price of $250 million. Over the weekend, Merrill Lynch & Co., the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.

"It's still uncertain ground we're treading. We just have to move on a daily basis," said Jack A. Ablin, chief investment officer at Harris Private Bank.

In late afternoon trading, the Dow fell 337.24, or 3.05 percent, to 10,721.78 after earlier being down nearly 400. After a nosedive Monday, the index is down more than 5 percent on the week, and has fallen more than 23 percent since reaching a record close of 14,164.53 on Oct. 9 last year.

Broader stock indicators also fell sharply. The Standard & Poor's 500 index dropped 42.70, or 3.52 percent, to 1,170.90, while the Nasdaq composite index fell 77.91, or 3.53 percent, to 2,129.99.

Fewer than 350 stocks rose on the New York Stock Exchange, while nearly 3,000 fell.

The stock market is likely to see heavy back-and-forth movement as traders continue to assess the flood of news that has poured in over the past several days.

On Monday, the Dow lost 504 points, the largest tumble since its drop following the September 2001 terror attacks. On Tuesday, it rose 141 points, after the Fed decided to leave interest rates unchanged.

Short-term Treasurys moved sharply higher as investors sought a safe place for at least the near future. Analysts reported heavy buying in T-bills, which range from three months to a year in maturities. But the yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.44 percent from 3.43 percent late Tuesday as longer-term debt fell.

Tom di Galoma, head of Treasurys trading at Jefferies & Co., characterized the mood of the bond market as "sheer panic." With turmoil in markets such as credit default swaps, which are essentially insurance policies against bond defaults, investors sought out alternative short-duration assets, he said.

The dollar was lower against other major currencies.

Commodities prices that have slumped in recent weeks amid growing signs of economic weakness, soared because of the appeal of hard assets.

Gold for December delivery shot up as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session; that was its largest ever one-day gain in dollar terms.

Crude oil that had also skidded lower amid a slowing economy rebounded $6.01 to settle at $97.16 a barrel on the Nymex after the government reported a drop in domestic crude and gas inventories. Oil dropped by about $10 a barrel on Monday and Tuesday.

The government took other measures Tuesday to help alleviate the turmoil in the markets. The Treasury said it will start selling bonds for the Fed to aid it with its lending efforts, while the Securities and Exchange Commission said it will strictly prohibit naked short-selling starting Thursday.

Short-selling occurs when traders borrow shares of a stock they expect will fall and sell them — if the stock does indeed fall, the traders buy the cheaper shares to cover the borrowed ones and profit from the difference. Naked short-selling occurs when sellers don't actually borrow the shares before selling them; it's a practice some say is partially responsible for the huge drop in the shares of investment banks like Lehman, Merrill Lynch and Bear Stearns Cos., which JPMorgan Chase & Co. bought earlier this year.

Among financial names getting hit, Goldman Sachs fell $25.93, or 20 percent, to $107.08 and Morgan Stanley fell $7.84, or 27 percent, to $20.86.

"People are afraid of the unknown and they don't know what's on the books of these companies," said Joe Saluzzi, co-head of equity trading at Themis Trading. "The first reaction in a situation like this is to sell."

Saluzzi noted that surging gold prices and other measures of investors jitters indicate that anxiety is building.

"There is a lot more fear today than there was on Monday and Tuesday," he said.

Indeed, the Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," at times jumped to its highest level since January.

Saluzzi is somewhat optimistic that the nervousness could be nearing a crescendo, which could squeeze out more investors and then clear the way for a snapback rally.

But the woes of the financial sector could also exacerbate problems facing other parts of the economy, given that individuals and businesses rely on the nation's money centers.

The Commerce Department reported Wednesday that home construction fell by 6.2 percent in August to 895,000 units, the slowest pace since January 1991. Slumping demand for houses, sinking home prices and mortgage defaults have been the catalysts behind Wall Street's turmoil — and the risky mortgage-backed assets held by the nation's banks are not apt to regain in value until the housing market turns around.

NYSE volume came to a heavy 1.57 billion shares.

Overseas, Japan's Nikkei stock average rose 1.2 percent after AIG's rescue, but Hong Kong's Hang Seng index lost 3.6 percent. Britain's FTSE 100 fell 2.25 percent, Germany's DAX index fell 1.75 percent, and France's CAC-40 fell 2.14 percent.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)