Fears on Lehman, financials send market into skid

By Steven C. Johnson

NEW YORK (Reuters) - Stocks plunged on Tuesday, driving the benchmark S&P 500 to its worst day in one and a half years, as concern about Lehman Brothers' ability to raise much-needed capital reignited fears about the broader financial sector.

Energy shares tumbled as oil prices fell more than $3 a barrel to a five-month low, hit by news that Hurricane Ike would veer away from Gulf of Mexico production facilities.

Shares of Lehman, the No. 4 U.S. investment bank, skidded 45 percent and renewed worries about other financial firms' ability to contend with mortgage losses. The S&P financial index fell 6.6 percent.

Lehman's percentage slide was its biggest since it went public in 1994, and fears about its survival doused Monday's optimism on the government's bailout of home finance firms Fannie Mae and Freddie Mac in an effort to boost the slumping housing market.

The S&P 500 shed more than 3 percent, while the Dow and Nasdaq fell more than 2 percent each.

"I think the No. 1 issue today is Lehman. Everybody is starting to ask whether Lehman will be able to raise capital and survive," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York.

"After yesterday's rally, one would have expected some profit-taking today, but it's been accelerated by what's happening to Lehman."

The Dow Jones industrial average was down 279.11 points, or 2.42 percent, at 11,231.63. The Standard & Poor's 500 Index was down 43.15 points, or 3.40 percent, at 1,224.64. The Nasdaq Composite Index was down 59.95 points, or 2.64 percent, at 2,209.81.

Standard & Poor's said the market value of the S&P 500 is down $3.1 trillion from its record closing high hit on October 9, 2007.

Lehman's slide began on news that talks about a possible investment into Lehman from Korea Development Bank had broken down, and it continued after Standard & Poor's rating agency said it could cut the investment bank's credit rating.

Lehman shares ended down 45 percent at $7.79. The slide was marked by a surge in volume, with more than 300 million shares changing hands in composite trading, the biggest volume surge since at least September 2002, said Cleveland Rueckert, market analyst at Birinyi Associates in Stamford, Connecticut.

"Lehman's been rumored to be in trouble for a while, and people were hoping the Koreans might bail them out, but now they're not sure that's going to happen," said Todd Leone, head of listed trading at Cowen & Co in New York.

State-owned Korean Development Bank on Tuesday declined to comment on its talks with Lehman over a possible investment.

Other financial shares also fell. American International Group, the world's biggest insurer, which also has substantial exposure to the mortgage market, fell 19.3 percent to $18.37, making it a top drag on the S&P 500.

HOUSING AND GROWTH WORRIES