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Stocks sink in early trading after AIG bailout

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Federal Reserve Leaves Interest Rates Unchanged
Traders work on of the New York Stock Exchange (NYSE) September 16, 2008 in New York City. In trading yesterday the Dow Jones Industrial Average fell 4.4% or 500 points, its worst single day loss since the terrorist attacks in September 2001.
Spencer Platt/Getty Images

Stocks skidded again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 200 points.

The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company. Wall Street had feared that the insurer, which has lost billions in the risky business of insuring against bond defaults, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

Lehman, after filing for bankruptcy protection on Monday, sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, on Tuesday for the bargain price of $250 million.

Stock traders
Traders work the floor of the New York Stock Exchange after the Fed board rate decision was announced March 18, 2008 in New York City. Stocks held on to their gains earned before the Federal Reserve's announcement of cutting a key interest rate by three-quarters, the Dow Jones was up 2.5 percent during afternoon trading.
Hiroko Masuike/Getty Images

The moves by the Fed and Barclays lift some of the uncertainty surrounding two of the most precarious pillars of the U.S. financial system, but investors' worries are far from erased.

The two independent Wall Street investment banks left standing - Goldman Sachs Group Inc. and Morgan Stanley - remain under scrutiny. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit and insisting that it is surviving the credit crisis that has ravaged many of its peers.

Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.

Furthermore, the troubles in the financial sector could exacerbate the problems facing the weak U.S. economy. The Commerce Department reported Wednesday that new home construction fell by 6.2 percent in August to 895,000 units, the slowest building pace since January 1991.

Slumping demand for houses, sinking home prices and mortgage defaults have been the catalysts behind Wall Street's turmoil - and the risky mortgage-backed assets held by the nation's banks are not apt to regain in value until the housing market turns around.

A day after Wall Street regained some of Monday's nosedive, the Dow fell 200.54, or 1.81 percent, to 10,858.48 in early trading.

Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 21.38, or 1.76 percent, to 1,192.22. The Nasdaq composite index fell 44.21, or 1.76 percent, to 1,192.22.

(Copyright 2008 by The Associated Press.  All Rights Reserved.)