Wall Street crumbles on fears Lehman is the next domino

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Looks like the credit crisis was fixed -- for one day.

Wall Street today careened back into panic mode over the financial system, as a collapse in shares of brokerage Lehman Bros. Holdings Inc. triggered widespread fear that it would be the next major domino to fall.

That sparked a huge sell-off across the stock market, one day after the Dow Jones industrials gained 290 points on the government’s move to take control of mortgage titans Fannie Mae and Freddie Mac.

Today, the Dow gave back nearly all of Monday’s advance, sliding 280.01 points, or 2.4%, to 11,230.73. Broader indexes fared worse: The Standard & Poor’s 500 sank 3.4% after rising 2.1% on Monday.

Losers swamped winners by more than 7 to 1 on the New York Stock Exchange -- a sign of deepening pessimism. And let’s not forget that we’re not even halfway through September, historically the worst month of the year for the stock market.

The sell-off accelerated today despite what used to pass for good news: another sharp drop in commodity prices. Crude oil futures fell $3.08 to $103.26 a barrel, the lowest since April 1.

Fearful investors again rushed into U.S. Treasury securities, driving the yield on the 10-year T-note to 3.57%, down from 3.68% on Monday and the lowest since mid-April.

‘The entire day was dominated by Lehman,’ said Tom Di Galoma, who trades Treasuries at brokerage Jefferies & Co. in New York.

Lehman’s stock ended down $6.36, or 45%, to $7.79 as investors fled. More than 370 million shares changed hands. Investors also hammered other financial issues, including Washington Mutual Inc., which dived 82 cents, or 20%, to $3.30, and American International Group, which slid $4.39, or 19%, to $18.37.

Lehman’s shares plunged early in the session on reports that the government-owned Korea Development Bank had decided against buying a stake in the firm, which needs a capital infusion to bolster its balance sheet. The stock fell further on rumors that other major banks and brokerages had stopped trading with Lehman -- the same rumors that preceded Bear Stearns Cos.’ demise in March.

But Citigroup, Goldman Sachs Group, Merrill Lynch & Co. and Morgan Stanley all said they still were doing business with Lehman. And analysts noted that all major brokerages, including Lehman, have an option that wasn’t available to Bear Stearns: They now can borrow directly from the Federal Reserve.

Late in the day, Lehman said it would announce its fiscal third-quarter earnings on Wednesday, a week in advance -- apparently in an attempt to calm investors.

The market’s lack of faith in Lehman is a harsh reminder that the housing-centered credit crisis is far from solved. The brokerage’s woes stem in large part from losses it has racked up on mortgage securities.

By seizing Fannie Mae and Freddie Mac -- and guaranteeing all of their debts -- the government hopes investors will be more willing to fund the companies, which in turn could drive mortgage rates lower.

There was more evidence today that that strategy is working: The average yield on Fannie Mae’s 30-year mortgage-backed bonds fell to 5.16%, after tumbling to 5.21% on Monday from 5.63% Friday. Falling yields indicate that the bonds are attracting more buyers.

But whatever fix that provides for housing, it will be a slow process. And the stock market’s message is that it’s just too late for some financial companies whose balance sheets have been ravaged, and who can’t find deep-pocketed investors willing to put up fresh capital.