Dow ends under 7,000, S&P tests 700 on AIG fallout

By Leah Schnurr

NEW YORK (Reuters) - U.S. stocks slid to 12-year lows on Monday as a record $61.7 billion loss for AIG and another government bailout for the insurer heightened concerns about the extent of the damage to the financial system.

Shares of companies that have found themselves on the wrong side of President Barack Obama's proposed budget fell again, with drugmakers and health insurers suffering a fourth day of losses amid worries their profits are under threat. The Morgan Stanley healthcare index has lost 26.4 percent over the past four days and the AMEX pharmaceutical index has dropped 12.3 percent over that same time span.

Disarray at banks around the world has pounded global stocks, pushing the Dow Jones industrial average to its first close below 7,000 since May 1997. Selling of financial, energy and industrial stocks briefly drove the S&P below 700 during the session for the first time since October 1996.

"The fear is that there is no end in sight for bailouts for the 'too big to fail' banks," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.

"The step in by the government to basically launch the third round of bailouts for Citigroup and the fourth round of bailouts for AIG has unsettled investors."

The Dow Jones industrial average slid 299.64 points, or 4.24 percent, to 6,763.29. The Standard & Poor's 500 Index fell 34.27 points, or 4.66 percent, to 700.82. The Nasdaq Composite Index shed 54.99 points, or 3.99 percent, to 1,322.85.

All 30 Dow components ended in the red, while all 10 of the S&P's sectors also were negative.

FEAR FACTOR ESCALATES

Wall Street's fear gauge, the Chicago Board Options Exchange Volatility Index, jumped 13.6 percent to 52.65, ending at its highest level since Jan 20, the day of President Obama's inauguration.

Worries that a multitude of efforts to shore up the ailing bank sector were not taking hold dragged the S&P financial index down 6.8 percent. Among laggards, Goldman Sachs fell 5.3 percent to $86.27 while Morgan Stanley slid 8.1 percent to $17.95.

Under the government's latest revised rescue plan, AIG will gain access to up to an additional $30 billion in new capital.

For details see [ID:nN02363433]. Last fall, AIG received a commitment for $150 billion in government aid. The company, once the world's largest insurer, also reported a fourth-quarter loss on Monday that was the biggest in U.S. corporate history.

Shares of AIG ended flat at 42 cents on the New York Stock Exchange.

The latest bailout comes on the heels of last week's plan for the government to boost its equity stake in Citigroup in order to bolster the bank's capital base. Citigroup's stock lost 20 percent to end at $1.20 on the NYSE.

Other stocks hit by the Obama budget include higher education lender Sallie Mae, which is down 57 percent in the last four days. Shares of Sallie Mae have been hit by a proposal in Obama's budget to axe the giant federally guaranteed student loan program.