* Spike in inter-bank lending rate fuels worry
* U.S. extends $85 billion loan to bail out AIG
* Morgan Stanley, Goldman Sachs tumble
* Dow off 4.1 pct; S&P down 4.7 pct, Nasdaq off 4.9 pct
(Updates to close)
By Kristina Cooke
NEW YORK, Sept 17 (Reuters) - U.S. stocks tumbled to a
three-year low on Wednesday as the U.S. rescue of insurer AIG
failed to calm a crisis of confidence in global markets and
banks were scared to lend to each other.
The Dow fell almost 450 points and the Nasdaq fell nearly
5 percent in its worst day since the aftermath of the Sept. 11
attacks in 2001 as rattled investors worried about who could
be the next victim of the global credit crisis.
Morgan Stanley <MS.N> shares sank 24.2 percent to $21.75
as investors worried whether it would survive as an
independent investment bank in the current environment.
Shares of the other remaining major U.S. investment bank,
Goldman Sachs <GS.N>, dropped 13.9 percent to $114.50 and at
one point fell below $100 for the first time in more than
three years.
"The fear is, 'Who is next?'" said John O'Brien, senior
vice president at MKM Partners LLC in Cleveland. "It almost
feels like people scour the books and say, 'Who is the next
likely target that we can put a short on?' and that spreads
continuous fear."
The Dow Jones industrial average <> fell 449.36
points, or 4.06 percent, to 10,609.66, its lowest level since
November 2005. It was the blue-chip Dow average's biggest
percentage drop since Monday, when it fell 504.48 points, or
4.42 percent, the most since the aftermath of 9/11.
The S&P 500 <.SPX> fell 57.20 points, or 4.71 percent, to
1,156.39, its lowest level since May 2005 and its biggest
percentage drop since Sept. 17, 2001, when the markets
reopened after the September 11 attacks.
The Nasdaq also fell the most since Sept. 17, 2001. It
shed 109.05 points, or 4.94 percent, to 2,098.85, its lowest
level since August 2006.
The White House defended government actions to shore up
troubled insurance company American International Group Inc
<AIG.N>, saying it was to prevent broader harm and said it was
"concerned about other companies." AIG is one of the 30
companies whose stocks make up the blue-chip Dow average.
Late Tuesday night, the Federal Reserve said the Federal
Reserve Bank of New York will lend up to $85 billion to AIG in
a plan aimed at saving the insurer from a "disorderly failure"
that could wreak economic havoc. But on Wednesday, investors
doubted whether the rescue plan would be enough. AIG shares
sank 45.9 percent to $2.03 on the New York Stock Exchange.
The Fed's move was the latest in a string of bailouts, a
bankruptcy on Wall Street, and central banks around the world
flooding the financial system with money to prevent it from
seizing up.
Strategists said the damage threatens to go beyond the
financial services sector, hurting corporate profits and
spreading panic among increasingly overstretched consumers.
"What does tomorrow bring? Will it start spilling over
into consumers? Will there be runs on the banks? There's a
million things going on," said Angel Mata, managing director
of listed equity trading at Stifel Nicolaus Capital Markets.
"Hopefully, we'll see a capitulation soon when everybody
throws in the towel," he added.
Also worrying investors was news on Tuesday that the
Reserve Primary Fund, a money-market mutual fund, fell below
$1 a share in net asset value because of losses on debt issued
by now-bankrupt Lehman Brothers Holdings <LEH.N><LEH.P>.
"Every investor is now questioning each and every
investment they have anywhere on the planet," said John
Schloegel, vice president of investment strategies at Capital
Cities Asset Management in Austin, Texas.
"It's leading them to sell anything that has any type of
risk -- to sell first. It's an unusual situation we are in
right now."
A break below important technical support for both the Dow
and S&P 500 accelerated the market's slide, traders said.
The bank-to-bank cost of borrowing overnight dollars fell
more than a percentage point on Wednesday, but the premium
paid for the greenback and sterling over three months swelled,
fanning fears that the supply of credit might be drying up in
the global financial system.
The drop in Morgan Stanley's shares came despite the
bank's posting quarterly results that beat Wall Street's
estimates.
Banks frantically seeking dollar funds have been
stonewalled by others increasingly reluctant to lend amid
uncertainty and nervousness following the collapse of Lehman
Brothers and the bailout of AIG.
The U.S. Securities and Exchange Commission issued new
rules governing the conduct of people who profit from stock
declines as shares of major financial institutions plummeted
on fears of a global credit crunch.
The three SEC rules cover shares of all publicly traded
companies and follow a brief emergency rule this summer that
was aimed at curbing illegal short selling in 19 major
financial stocks. []
Trading was heavy on the New York Stock Exchange, with
about 2.14 billion shares changing hands, above last year's
estimated daily average of roughly 1.9 billion, while on the
Nasdaq, about 3.11 billion shares traded, also trumping last
year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by 15 to 1 on
the NYSE and on the Nasdaq, by 6 to 1.
(Additional reporting by Ellis Mnyandu; Editing by Jan
Paschal)
