Stocks resume brutal sell-off; gold soars, T-bill yields dive

Stocks plunged again Wednesday as anxieties about the financial system ran high after the government’s bailout of insurer American International Group and left investors with little confidence in many banking stocks.

The Dow Jones industrial average lost about 450 points, giving it a drop of more than 800 points so far this week.

As investors fled stocks, they sought the safety of hard assets and government debt, sending gold and oil soaring and yields on Treasury bills plunging.

Wall Street had feared that AIG, which has extensive ties to various financial services industries around the world, would follow investment bank Lehman Bros. Holdings into bankruptcy. However, the ramifications of the world’s largest insurer going under probably would have far surpassed the demise of Lehman.

The two independent Wall Street investment banks left standing -- Goldman Sachs Group and Morgan Stanley -- remain under scrutiny, as does Washington Mutual, the country’s largest thrift. Morgan Stanley revealed better-than-expected quarterly results late Tuesday and insisted that it was surviving the credit crisis that has ravaged many of its peers.

Lehman filed for bankruptcy protection Monday. Over the weekend, Merrill Lynch & Co., the world’s largest brokerage, sold itself to Bank of America in a quickly arranged plan to sidestep further slides in its stock.

“It’s still uncertain ground we’re treading. We just have to move on a daily basis,” said Jack A. Ablin, chief investment officer at Harris Private Bank.

The Dow fell 449.36 points, or 4.1%, to 10,609.66, finishing not far off its lows of the session. On Monday, the Dow lost 504 points, the largest tumble since its drop after the September 2001 terror attacks. On Tuesday, it rose 141 points, after the Fed left interest rates unchanged.

The index is down more than 7% on the week, its worst showing since July 2002. The blue chips have fallen more than 25% since reaching a record close of 14,164.53 on Oct. 9 last year.

Broader stock indicators also fell sharply Wednesday. The Standard & Poor’s 500 index dropped 57.21 points, or 4.7%, to 1,156.39, while the Nasdaq composite index fell 109.05 points, or 4.9%, to 2,098.85.

About 200 stocks rose on the New York Stock Exchange, while about 3,000 fell.

The stock market will probably see heavy back-and-forth movement as traders continue to assess the flood of news that has poured in so far this week.

Short-term Treasurys moved sharply higher as investors sought a safe place for at least the near future. There was heavy buying in T-bills, which range from three months to a year in maturities. But the yield on the benchmark 10-year Treasury note slipped to 3.42% from 3.44% late Tuesday.

The dollar was lower against other major currencies.

Commodity prices, which have slumped in recent weeks, soared because of the appeal of hard assets.

In futures trading, gold jumped $70.10 -- its largest-ever one-day gain in dollar terms -- to $846.60 an ounce. Crude oil jumped $6.01 to $97.16 a barrel after the government reported a drop in domestic inventories. Oil dropped by about $10 a barrel over the preceding two days.

Among financial names getting hit, Goldman Sachs fell $18.51, or 14%, to $114.50 and Morgan Stanley fell $6.95, or 24%, to $21.75. AIG fell $1.70, or 45%, to $2.05.

The Commerce Department reported that home construction fell 6.2% in August to 895,000 units, the slowest pace since January 1991.

Overseas, key indexes rose 1.2% in Japan but fell 3.6% in Hong Kong, 2.3% in Britain, 3.6% in Hong Kong, 1.7% in Germany and 2.1% in France.