Commerce Department also reports drop in new home construction
NEW YORK - Stocks skidded again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 200 points.
The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company. Wall Street had feared that the insurer, which has lost billions in the risky business of insuring against bond defaults, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.
Lehman, after filing for bankruptcy protection on Monday, sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, on Tuesday for the bargain price of $250 million.
The moves by the Fed and Barclays lift some of the uncertainty surrounding two of the most precarious pillars of the U.S. financial system, but investors' worries are far from erased.The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit and insisting that it is surviving the credit crisis that has ravaged many of its peers.
Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.
Furthermore, the troubles in the financial sector could exacerbate the problems facing the weak U.S. economy. The Commerce Department reported Wednesday that new home construction fell by 6.2 percent in August to 895,000 units, the slowest building 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.
A day after Wall Street regained some of Monday's nosedive, the Dow fell 200.54, or 1.81 percent, to 10,858.48 in early trading.
Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 21.38, or 1.76 percent, to 1,192.22. The Nasdaq composite index fell 44.21, or 1.76 percent, to 1,192.22.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, giving investors a bit of assurance about the direction of the economy and the financial sector.
Bond prices dipped early Wednesday. 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. The dollar was lower against other major currencies, while gold prices rose.
Crude oil rebounded $2.91 to $94.06 a barrel on the New York Mercantile Exchange. Crude has dropped by about $10 a barrel over the past two days due to concerns that troubles in the financial sector will dampen the economy and cause big funds to unwind their commodities bets.
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.
In morning trading in Europe, Britain's FTSE 100 fell 2.02 percent, Germany's DAX index fell 0.12 percent, and France's CAC-40 rose 0.55 percent.
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