U.S. stocks tumble as critical insurer teeters


AP

NEW YORK — Stocks tumbled again Wednesday as investors remained worried about chaos in the U.S. financial market even after the Federal Reserve forged an extraordinary US$85 billion rescue of insurance giant American International Group Inc.

The Federal Reserve’s emergency loan to shore up AIG, the world’s largest insurer, temporarily lifted some uncertainty about the stability of the U.S. financial system, but the market fell again as investors kept a wary eye on the company, which is reeling from billions of dollars in souring mortgage debt.

The two Wall Street investment banks left standing after a week of stunning upheavals — Goldman Sachs Group Inc. and Morgan Stanley — also remain under scrutiny. And the troubles in banking could exacerbate economic problems. The Commerce Department said Wednesday that housing starts fell by 6.2 percent in August to the slowest building pace since January 1991.

The Dow fell 249.15 Wednesday, or 2.25 percent, to 10,809.87. A 500-point drop on Monday marked the largest in the Dow Jones industrials since the Sept. 11, 2001, terrorist attacks, as the venerable Wall Street giant Lehman Brothers filed for the biggest bankruptcy in U.S. history.

Investors fear that a failure of AIG, the world’s largest insurer, would set off even more financial turmoil than the collapse of Lehman.

“We dodged a bullet, but we want to make sure it’s a complete cease-fire,” said Jack A. Ablin, chief investment officer at Harris Private Bank, noting that AIG still needs to unwind its investment positions, sell off assets, and possibly get more cash.

The government was taking other measure to help alleviate the turmoil. The Treasury said it will start selling bonds for the Fed in an unprecedented effort 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 is when traders borrow shares of a stock they expect to 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. The Fed said Tuesday night that it was acting to shore up AIG after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could hurt the already delicate markets and the economy.