Wall Street mauled by Lehman bankruptcy, AIG fears

By Kristina Cooke

NEW YORK (Reuters) - Wall Street had its worst day since markets reopened after the September 11 attacks as fears about the U.S. financial system's stability surged on Monday after Lehman Brothers filed for bankruptcy and insurer AIG struggled for survival.

The day followed one of Wall Street's most agonizing weekends ever, which saw the demise of Lehman Brothers and forced Merrill Lynch to accept a takeover by Bank of America Corp.

But Sunday's barrage of shocking news was no exorcism for anxious investors and traders. As concerns about AIG's scramble for capital mounted, the Wall Street Journal reported that the U.S. government has asked Goldman Sachs and JPMorgan Chase to lead a lending facility of $70 billion to $75 billion for the insurer.

Financial services companies' shares led a broad and steep decline in major indexes as investors worried about the impact of the latest twists in the credit crisis on the economy and the outlook for profits.

"The turmoil continues," said Robert Francello, head of equity trading for Apex Capital, a San Francisco hedge fund.

"And it seems to be people underestimated the impact of AIG and what the fallout of that could be."

The benchmark Standard & Poor's 500 index fell 59.00 points, or 4.71 percent, to 1,192.70 -- posting its biggest

percentage drop since the day that markets reopened after the September 11 attacks in 2001.

The S&P 500 also tumbled to its lowest close since October 2005, taking out a key technical support level as it fell.

The Dow Jones industrial average slid 504.48 points, or 4.42 percent, to 10,917.51 -- its biggest one-day point drop since September 2001.

The Nasdaq Composite Index dropped 81.36 points, or 3.60 percent, to 2,179.91.

Lehman, weighed down by losses spawned by the U.S. mortgage crisis, sought bankruptcy protection on Monday following a scramble over the weekend in which it failed to find a buyer.

Merrill Lynch, meanwhile, agreed to be bought by Bank of America Corp, the No. 2 U.S. bank. Merrill's stock closed just 0.1 percent higher at $17.06, but Bank of America's shares dropped 21.3 percent to $26.55.

"There's some concern they (Bank of America) might have bit off more than they could chew," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

Shares of Wall Street firms such as Goldman Sachs and Morgan Stanley also slid on concerns about the viability of their business models, which are similar to those of Lehman Brothers and Bear Stearns, analysts said.