Investors survived the first trading day of the Wall Street financial crisis, but many remained worried about what happens next.
A day after investment bank Lehman Brothers filed for bankruptcy and Merrill Lynch was forced to sell itself to Bank of America, the focus of many investors turned to giant insurer AmericanInternational Group, which is struggling for survival.
The market is worried about a possible failure of AIG as early as Tuesday morning, said Matt Cheslock, a senior specialist at Cohen Specialists, and traders just don't want to stick their necks out amid that kind of uncertainty.
"If AIG fails tomorrow morning, it's the same thing written all over this market," Cheslock said. "I don't think anyone is going to want to take any positions overnight."
US stocks closed sharply lower as worries about AIG—on top of the crises at Lehman and Merrill—sparked a 500-point drop in the Dow. Markets in Asia and Europealsosold off, though Tokyo and several other Asian money centers were closed for holidays.
The dollar sank against the yen and the euro.
Oil prices, responding to the turmoil in financial markets more than Hurricane Ike, plunged to $92 a barrel.
But AIG's survival remains uncertain, and investors are worried that there are other companies that may need to raise capital to cover mortgage-related losses.
Treasury Secretary Henry Paulson said on Monday the U.S. financial system remained sound despite current stresses and he was prepared to take further actions if necessary to maintain stability.
"So far, the efforts of the US government have failed to bring any stability to the financial markets,'' said Kathy Lien, director of currency research at Global Forex Trading.
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Besides AIG, investors were also watching these developments late Monday:
—Lehman Brothers , which filed for bankruptcy Sunday to became the largest casualty of the global credit crisis, is in advanced talks to sell its investment management business, including the crown jewel, Neuberger Berman.
—Bank of America's purchase of Merrill Lynch for $50 billion in stock will create a banking giant that offers everything from fixed-income trading to credit card lending.
The events of the past few days signal a seismic shift in Wall Street's power structure, with big name investment banks biting the dust and major banks like Bank of America and JPMorgan Chase becoming the survivors.
"It's a return to pure capitalism, the survival of the fittest—the government can't and won't bail everybody out," said Justin Urquhart Stewart, investment director at 7 Investment Management in London.
"This shows the U.S. government is saying 'enough' after saving other institutions, and that they see Lehman as a private affair," said Marie-Pierre Pillon, head of equity and credit research at Groupama Asset Management in Paris. "I think today and tomorrow there will be a panic on the markets."
Video: Comparing the current financial crisis to previous ones
The turmoil on Wall Street, just a week after the U.S. government bailed out mortgage giants Fannie Mae and Freddie Mac, sparked a wave of risk aversion through all asset classes.
"There is a high likelihood that the distress in financial markets and wider evidence of slowing global growth are prompting investors, particularly U.S. investors to repatriate those flows back into the U.S.," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi-UFJ.
A classic safe-haven, gold, initially jumped 2 percent before paring gains, while U.S. Treasury yields, which fall as prices rise, hit multi-month lows.
The Fed said it would begin accepting equities as collateral for emergency loans for the first time—a step likely to help surviving financial institutions find cash but which may not do much to boost global confidence in the U.S. financial system.
The response began with the U.S. Federal Reserve, which said central banks, regulators and supervisors were in close contact on international scale and monitoring events as they unfolded.
It announced emergency measures for lending operations which effectively relax the terms on which banks can borrow from the central bank.
In Europe, the European Central Bank, as well as the German, French, British and Swiss authorities all responded in turn.
—Reuters and AP contributed to this report.