Capital Gold Group Report: U.S. Stocks Drop as Lending Freezes Up Following AIG Takeover

By Elizabeth Stanton and Lynn Thomasson

Sept. 17 (Bloomberg) -- U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc., raising concern that more of the nation's biggest financial companies will fail.

Goldman Sachs Group Inc. and Morgan Stanley, the two remaining independent U.S. securities firms after Lehman Brothers Holdings Inc. collapsed and Merrill Lynch & Co. was taken over, plunged the most ever. General Electric Co., the world's third- biggest company, fell 7.7 percent and U.S. Steel Corp. slid 11 percent. Yields on three-month Treasury bills sank to a 54-year low as investors sought the relative safety of government debt, and a measure of corporate borrowing costs surged to the highest since the crash of 1987.

``It's ugly,'' said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. ``It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now.''

The S&P 500 lost 48.01, or 4 percent, to 1,165.58 at 12:30 p.m. in New York, its lowest level in almost three years as all 10 of the main industry groups declined. The Dow Jones Industrial Average decreased 355.56, or 3.2 percent, to 10,703.46 with three of its 30 companies gaining. The Nasdaq Composite Index sank 78.11, or 3.5 percent, to 2,129.79, falling below its previous low for the year on March 10. More than 10 stocks retreated for each that rose on the New York Stock Exchange. 

Value Erased

About $2.8 trillion of market value has been erased from global stocks this week, triggered by the largest-ever bankruptcy filing by Lehman Brothers, once the fourth-largest U.S. securities firm. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.

Gold and silver surged as investors turned to precious metals as a store of value.  Newmont Mining Co., the largest U.S. gold producer, rose 7.3 percent to $42.43 for the second- biggest gain in the S&P 500.

Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 13 percent to 34.27, which would be the highest closing level since February 2003. The VIX measures the cost of using options as insurance against declines in the S&P 500.

`Protracted' Battle

Morgan Stanley slid $9.61, or 33 percent, to $19.09 after Oppenheimer & Co. analyst Meredith Whitney and Merrill Lynch & Co.'s Guy Moszkowski reduced their fourth-quarter profit estimates, citing higher funding costs. The lowered forecasts come a day after Morgan Stanley's profit beat estimates.

``We believe Morgan Stanley, along with its peers, will battle a protracted period of negative operating leverage,'' Whitney wrote in a note to clients.

Goldman slid $28.59, or 21 percent, to $104.42. Oppenheimer cut its fourth-quarter earnings estimate to $2.60 a share from $3.45.

The three-month London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said.

U.S. Treasury three-month bill rates dropped to as low as 0.15 percent and the so-called TED spread, the difference between what the Treasury pays to borrow for three months and the amount banks charge each other for loans, widened by 0.73 percentage point to 2.91.

AIG Takeover

AIG, the largest U.S. insurer by assets, lost $1.69, or 45 percent, to $2.06 and extended its decline over the past year to 97 percent, after the government said it will receive a 79.9 percent stake in return for an $85 billion loan that analysts said will be repaid by liquidating the company.

``A disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a central bank statement yesterday.

The S&P Financials Index slumped 8.7 percent as 85 of its 86 companies retreated.

Banks and brokerages also fell after the Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman. Investor redemptions will be delayed as long as seven days, the fund said.

``There's just a massive retrenchment in risk appetite,'' said Robert Stimpson, a money manager at Oak Associates Ltd. in Akron, Ohio, which oversees $1.1 billion. ``We've seen three cornerstones of Wall Street fall by the wayside in the last six months. Is anyone safe? It's a legitimate question.''

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