Stocks Plummet on AIG Rescue

Stocks plunged to multi-year lows Wednesday after the U.S. government’s historic bailout of AIG (NYSE: AIG) did nothing to calm a growing financial panic.

AIG’s inability to raise funds led to what appears to be the first failure of a Dow company in the index’s 112-year history. The government’s decision that an AIG bankruptcy could be catastrophic for financial markets underscored just how much danger lies in the highly leveraged and unregulated debt instruments at the heart of the crisis.

Whether Thursday can provide any relief remains to be seen, as the SEC will reinstate short-selling limits and Washington Mutual (NYSE: WM) and Morgan Stanley (NYSE: MS) are reportedly in merger talks.

With credit markets seized up in a way not seen since the crash of 1987, officials like Fed Chairman Ben Bernanke, a long-time student of the causes of the Great Depression, and Treasury Secretary Henry Paulson are scrambling to provide markets with the credit and liquidity needed to ease the crisis. One idea being floated is for a fund like the Resolution Trust Fund set up to cope with the Savings and Loans crisis of the 1980s. And with the kind of terms the government squeezed out of AIG, the government could eventually wind up making money on the crisis.

A number of tech names suffered equally in Wednesday’s decline. Nortel (NYSE: NT) plunged 49% on a warning, and VMware (NYSE: VMW) lost nearly 13% on a downgrade.

SanDisk (NASDAQ: SNDK) was a rare winner, soaring on a takeover offer from Samsung.

Adobe (NASDAQ: ADBE) shares lost 5% despite beating estimates. Oracle (NASDAQ: ORCL) and Palm (NASDAQ: PALM) will report their quarterly results late Thursday.

Apple (NASDAQ: AAPL) lost 8.6% and Google (NASDAQ: GOOG) fell 6.4% despite a green technology deal with GE (NYSE: GE).

The Nasdaq plunged 109 to 2098, the S&P fell 57 to 1156, and the Dow lost 449 to 10,609. Volume declined to 9.4 billion shares on the NYSE, and 3.16 billion on the Nasdaq. Decliners led by a 30-2 margin on the NYSE, and 25-4 on the Nasdaq. Downside volume was 95% on the NYSE, and 85% on the Nasdaq. New highs-new lows were 12-1017 on the NYSE, and 29-425 on the Nasdaq.

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