U.S. Stocks Decline as Lehman Bankruptcy Deepens Market Turmoil

By Lynn Thomasson

Sept. 15 (Bloomberg) -- U.S. stocks tumbled, erasing almost $400 billion in market value, as Lehman Brothers Holdings Inc.'s bankruptcy fueled speculation credit-market turmoil will deepen.

Lehman plunged 93 percent after the 158-year-old investment bank's subprime mortgage losses pushed it into the biggest Chapter 11 filing in history. American International Group Inc. retreated 39 percent as the biggest U.S. insurer sought capital, while Bank of America Corp. slumped 12 percent after agreeing to buy Merrill Lynch & Co. for $50 billion. Exxon Mobil Corp. and Valero Energy Corp. sent energy shares in the Standard & Poor's 500 Index to a 4.5 percent retreat as oil plunged 5.3 percent. Stocks fell across Europe and Asia, the dollar lost the most against the yen in a decade and Treasuries surged.

``Until you get some panic out of those equities, it's going to be hard to get any sustainable rallies,'' said Bruce McCain, the Cleveland-based chief investment strategist at Key Private Bank, which oversees about $30 billion. ``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.''

The S&P 500 declined 29.86 points, or 2.4 percent, to 1,221.84 at 10:06 a.m. in New York. December futures on the benchmark index had fallen as much as 4.4 percent. The Dow Jones Industrial Average sank 325.35 to 11,096.64. The Nasdaq Composite Index decreased 44.47 to 2,216.80. Almost 16 stocks slipped for each the rose on the New York Stock Exchange. Europe's Dow Jones Stoxx 600 Index lost 4.4 percent, the most since March 17.

The S&P 500 has decreased more than 20 percent since an October record as worldwide bank losses from the first nationwide decline in U.S. home values since the Great Depression reached $513.6 billion. Financial shares led the retreat, losing 41 percent through last week. Plunging profit at banks and brokers drove the price-to-earnings ratio of the S&P 500 to an almost five-year high of 26 last month.

Rate-Cut Odds

Yields on two-year Treasury notes fell below 2 percent for the first time since April, as traders in futures contracts gave 64 percent odds the Federal Reserve will cut its benchmark interest rate to 1.75 percent from 2 percent by tomorrow. The yen gained as much as 3.4 percent to 104.54 per dollar.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America abandoned takeover talks yesterday and the company lost 94 percent of its market value this year.

``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.''

Lehman sank $3.39 to 26 cents. JPMorgan Chase & Co., whose March takeover prevented Lehman rival Bear Stearns Cos.'s bankruptcy, fell 2.2 percent to $40.26. Citigroup Inc., the largest U.S. bank by assets, declined 5.1 percent to $17.05.

`Quite Favorable'

Lehman's bankruptcy is ``quite favorable,'' said Gloom, Boom & Doom Report publisher Marc Faber.

``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,'' he said in a Bloomberg Television interview from Thailand.

AIG shares lost $4.68 to $7.46. The insurer was working on plans late yesterday to raise capital and sell units to forestall credit downgrades from hobbling the company. Billionaire investor Warren Buffett's Berkshire Hathaway Inc. ``is thought to be in talks'' with AIG about a possible investment, the Insurance Insider reported, citing unidentified sources.

Goldman Sachs Group Inc. and JPMorgan were downgraded by Merrill Lynch analysts. Goldman Sachs, which lost 5.2 percent to $146.24, was lowered to ``neutral'' on the likelihood Lehman's bankruptcy will reduce profitability for the biggest U.S. securities firm. The analysts cut their JPMorgan recommendation to ``underperform'' and predicted the lender will report a third- quarter loss.

`Once in a Century Event'

Former Federal Reserve 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 today on ABC's ``This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.

Merrill climbed 31 percent to $22.34. Bank of America, the biggest U.S. consumer bank, will pay $29 a share to buy the company as the credit crisis claimed another of America's oldest financial institutions. Bank of America shares fell $3.91 to $29.83.

Washington Mutual retreated 14 percent to $2.35. 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. The federal government may have to provide that much in mortgage guarantees in order to attract a buyer for the Seattle-based bank, Bove said.

``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.

The S&P 500 Energy Index lost 4.5 percent. Exxon fell 2.5 percent to $75.54, and Valero declined 9.9 percent to $32.31.

Crude oil plunged $5.44 to a seven-month low of $95.74 a barrel in New York as refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.