The Dow Jones Industrial Average dropped 280 points, undoing a Monday stock rally inspired by the government takeover of Fannie Mae and Freddie Mac, as anxiety about the financial sector returned to the markets. Lehman Brothers Holdings shares dropped 45% after talks between the firm and Korean investors ended without a deal. Investors snapped up Treasury securities and the Chicago Board Options Exchange Volatility Index jumped 13%.

Lehman's Slide Rattles Stocks Anew

By PETER A. MCKAY

September 9, 2008 3:21 p.m. Eastern Time

A day after the government takeover of Fannie Mae and Freddie Mac helped ease investors' nervousness about the housing and financial markets, markets were roiled anew by worries about the health of Lehman Brothers Holdings.

Financial stocks tumbled as negotiations fell through between Lehman Brothers and Korean investors, underscoring the risks that remain for firms looking for capital to shore up their balance sheets. Lehman shares plunged roughly 44% in recent trading to trade below $9.

The Dow Jones Industrial Average, which soared nearly 290 points Monday after the rescue of Fannie and Freddie was unveiled, recently fell by about 200 points to around 11310. Other indexes saw even sharper declines. The Standard & Poor's 500 Index fell 2.7% to around 1233. The Nasdaq Composite Index fell 2.1% to roughly 2222. The Russell 2000 index of small-cap stocks shed 2.7%.

"Everyone is looking for a solution to the housing problem," said Anthony Conroy, head of trading at BNY ConvergEx Group, a New York stock brokerage. "The [Fannie and Freddie bailout] is one piece of that solution, but there are still a lot of other moving parts that have to get going for the situation to resolve itself."

The rally financial stocks enjoyed Monday proved fleeting. Washington Mutual shares tumbled 22% and American International Group slid by 18%. Mortgage insurers Radian Group and PMI Group swooned roughly 20% each.

Fear gauges across markets bounced. The Chicago Board Options Exchange Volatility Index, or VIX, was recently up by more than 11%. Investors packed into Treasurys, especially longer-dated maturities. The 10-year note jumped up 26/32 to to 3.598%, and the 30-year bond surged 1-13/32 to 4.192%. Declining shares outpaced advancers on the New York Stock Exchange by roughly 2,700 to 450. A similar ratio was seen in trading on the Nasdaq Stock Market.

In the options market, the implied volatility of financial names exploded. The implied volatility in Lehman options increased 88% to a new record, according to Interactive Brokers. Implied volatility in Washington Mutual jumped to 210%, suggesting investors expect to see wild swings in the thrift's shares.

A sharp drop in crude-oil prices on Tuesday buoyed most stock sectors but pushed energy producers' shares lower. That in turn weighed on major market yardsticks, which have become increasingly energy-oriented over the past 12 months or so as other categories have fallen into the doldrums, especially the financial sector.

Crude-oil futures shed about $2 to trade just above $104 a barrel, weighed by expectations that the Organization of Petroleum Exporting Countries will leave its production targets unchanged at its Tuesday meeting.

Amid the ongoing financial turmoul other dangers remain for investors. Prices of homes in the U.S. remain low and inventories of unsold units remain high, which has cut into many average Americans' wealth and could keep prices of mortgage securities depressed in the months ahead.

That point was underscored Tuesday as new data showed that a forecasting gauge of home sales resumed falling in July. The National Association of Realtors' index for pending sales of previously owned homes dropped 3.2% to 86.5 from 89.4 in June, a bigger drop than analysts had been expecting.

Ahead of the report, Credit Suisse downgraded a quartet of home builders -- Toll Brothers, Pulte Homes, D.R. Horton and KB Home. Credit Suisse noted home prices need to fall further and credit availability must improve to spur sales and restore affordability. All four stocks were down at least 8%.

The dollar weakened against major rivals. The euro recently traded at $1.4197, up from $1.4145 late Monday. Against the Japanese currency, the dollar fell to 107.04 yen, down from 108.08 yen.

Capital Gold Group, gold group, gold, gold prices, gold news, gold coins, gold bullion, gold IRA, IRA gold