World - Global markets fall after Wall Street Trauma

Markets stumbled around the world Monday and continued falling Tuesday as nervous investors sought to make sense of the financial earthquake that shook Wall Street to its foundations this weekend with the bankruptcy filing of the investment bank Lehman Brothers, the takeover of Merrill Lynch and the plea for government help from the global insurance giant American International Group.

The Dow Jones industrial average closed 504.48 points lower, or 4.4 percent, at 10,917.51. The broader Standard & Poor's 500-stock index fell 58.17 points, or 4.7 percent, to end at 1,193.53, and the Nasdaq composite index closed 81.36 points lower, or 3.6 percent, at 2,179.91. Lehman shares became essentially worthless in the first trading session after the firm filed for bankruptcy.

On Tuesday, the Nikkei stock average in Japan was down more than 4 percent as investors reacted to developments on Wall Street.

In the United States on Monday, equities slid immediately after the opening bell, following earlier declines in benchmark indexes in Europe and parts of Asia, but recovered some ground as trading continued and news emerged that AIG would receive assistance from New York State regulators.

Pledges of support from central banks in Europe and the infusion of billions of dollars into global money markets helped temper the declines in global stock markets. Analysts emphasized that the atmosphere among traders, at least on Monday, stopped well short of the meltdown that many had feared.

"Investors are wandering around in a daze," said Stephen Lewis, head of research at Monument Securities in London. "It's not a panic by any means, but there is a sense that we'll see a few more weekends like the last two and then we're looking at a long, long convalescence."

Yields on U.S. Treasury securities fell sharply as investors scrambled to protect their cash in ultrasafe government notes. The dollar was mixed against other currencies and gold rose. The flight from risk is expected to contribute to a further slowdown in the U.S. economy, which is likely to ripple through the rest of the world.

Another sign that investors are betting on a global economic pullback was a big drop in the price of crude oil, which fell more than $4 a barrel in New York trading at around $97, heading toward a close under the $100 a barrel level for the first time since March.

Lehman's bankruptcy filing, combined with the initial fears that AIG might be the next venerable financial institution to collapse, threatened to saddle other firms around the world with new losses. Investors in Europe and the United States said it was still unclear exactly what Lehman held on its books and how long the unwinding would take. Individual investors will suffer from the market declines, but the liquidation of Lehman and the absorption of Merrill Lynch into Bank of America will not wipe out the holdings of their customers, who are protected by an industrywide insurance fund.

In an afternoon press conference, the U.S. Treasury secretary, Henry Paulson Jr., explaining why he refused to provide government funds to rescue Lehman, sought to assure the public that it can be confident in the "soundness and resilience in the American financial system."

In Europe, the broad Dow Jones Stoxx 600 index declined 3.5 percent. The FTSE 100 fell 3.5 percent in London and the CAC 40 in Paris fell 3.8 percent.

Markets in Japan, South Korea, Hong Kong and China were closed for holidays, although the handful of smaller markets in Asia that were open slid. Hardest hit were markets that are relatively open to international capital flows and located in countries that are periodically vulnerable to political turmoil. The benchmark Taiwan index shed 4.1 percent and the BSE lost 3.4 percent in Mumbai.

Peter Redwood, the director of Asian research in Singapore for Barclays Capital, said that in the longer term, the latest difficulties in the United States were likely to hurt Asian markets. "This is an increase in risk globally," he said, adding that this was "unambiguously negative for Asia and for capital outflows from Asia."

Yen strength was a defining theme on a volatile day for currency markets. Ian Stannard, a senior currency strategist in London for BNP Paribas, said investors reduced so-called carry trades, where funds are borrowed in a country with low interest rates, like Japan, and used to buy assets where returns are higher.

The euro erased its initial sharp gains against the dollar, falling almost 3 cents from session highs to $1.4183 by Monday afternoon. Stannard said the dollar's initial weakness was reversed amid a "flight to quality" as investors repatriated funds into dollar assets from around the globe. The pound and the Australian dollar both fell.

Bond prices, meanwhile, rallied as investors sought the safer waters of fixed-income investments. The yield on 10-year Treasury notes dropped 24 basis points to 3.48 percent. The 10-year German bund yield fell 13 basis points to 4.048 percent. A basis point is one-hundredth of a percentage point.

To help Wall Street brace for Lehman's bankruptcy, the U.S. Federal Reserve broadened the collateral it would accept for emergency loans to securities firms. A group of 10 banks, including JPMorgan Chase, Goldman Sachs and Citigroup, separately formed a $70 billion fund to ensure market liquidity.

The European Central Bank said Monday that it was "ready to contribute to orderly conditions in the euro money market," a formulation that indicated it was worried that the chaos in banking across the Atlantic would quickly spread to Europe. Demand for funds exceeded the €30 billion, or $42.5 billion, short-term loans the ECB made Monday, suggesting that it may have to step in again in coming days.

The Bank of England said it would lend £5 billion, or $8.9 billion, over the next three days at 5 percent. It said it would "be monitoring carefully the conditions in sterling money markets and will take appropriate actions if necessary." The Financial Services Agency of Japan said Monday that it was reviewing the exposure of Japanese banks, brokerage firms and other financial institutions to Lehman.

Some analysts expressed fears that the financial turmoil would dent already faltering economic growth, especially in Europe. "There is the possibility of intensifying financial problems that will impact the U.S. economy and then spill over into Europe and other markets," said Ken Wattret, chief euro-zone economist at BNP Paribas. "The momentum downward is building."

He also said that there was "increasing pressure on central banks to act," but that the Fed was more likely to cut interest rates than the ECB. Fed policy makers will meet Tuesday to consider its benchmark rate, currently set at 2 percent, compared with 4.25 percent in the euro zone.

In European markets, the focus was on banks and insurers amid fears that they will face more write-downs and the possible need for government support.

"We though the worst had passed," said Yann Azuelos, a fund manager at Meeschaert, an asset manager in Paris. "Now we know it hasn't."

Matt Saltmarsh reported from Paris. Further reporting was contributed by Keith Bradsher in Hong Kong; Tim Johnston in Sydney; Martin Fackler in Tokyo; Julia Werdigier in London; and Carter Dougherty in Paris.