Wall Street's meltdown sent the stock market reeling and left Main Street with one sobering thought: It isn't over yet.
The record bankruptcy filing of Lehman Brothers yesterday and fire sale of Merrill Lynch to Bank of America raised the specter of further blowouts threatening the stability of an already-battered financial system in the months ahead.
Unlike a stock market crash that hits all at once, the "agonizing and deep-seated" drumbeat of trouble seems certain to drag on, said market veteran Phil Hummer of Chicago's Wayne Hummer Investments. "I've been hoping we would see the turning point, but I think it could be a long, long process."
The latest takedown of storied names in American business sparked a guessing game about which remaining financial giant would falter next. Those fears touched off the biggest drop in the Dow Jones industrial average since 2001: 504 points. About $700 billion evaporated from retirement plans, government pension funds and other investment portfolios.
Making matters worse, investors targeted the stocks of giant insurer AIG and savings-and-loan Washington Mutual, both down sharply in yesterday's feverish session.
Why the meltdown at once-great firms? Too much debt, inattention to risk, and leaders who failed to keep track of their operations, said James Tyree, head of Mesirow Financial in Chicago. "I see continued turmoil in general in the financial markets," he said. "These are the inevitable results of excess."
Treasury Secretary Henry M. Paulson Jr., who refused to toss a financial lifeline to Lehman, was unapologetic as the Bush administration signaled strongly that Wall Street shouldn't expect more rescues from Washington.
The American people should remain confident in the "soundness and resilience in the American financial system," Paulson told reporters at the White House.
Six months ago, Paulson moved to prevent the collapse of Bear Stearns, brokering a deal for JP Morgan Chase & Co. to buy the firm at a fire-sale price with Federal Reserve backing. This month, he stepped in to help the government seize Fannie Mae and Freddie Mac in hopes of reversing the housing and credit crises.
But yesterday, Paulson said he "never once" considered putting taxpayer money at risk to resolve the problems at Lehman Brothers, which was saddled with $60 billion worth of soured real estate holdings.
The result was one of the most momentous days in Wall Street history since legendary banker J. Pierpont Morgan helped broker the rescue of financial markets during the Panic of 1907.
The Dow dropped 504.48 points to close at 10,917.51, the first time since July it has finished under 11,000. It was the sixth-largest point drop ever and the worst since Sept. 17, 2001, when the average fell 684.81 points on the first day of trading after the terror attacks.
In percentage terms, the Dow's fall yesterday was its worst since summer 2002. The index has shed nearly a quarter of its value since its record high in October.
While lower Manhattan is the epicenter of the problems, the impact is global and local.
Ultimately, the financial industry's troubles will contribute to higher unemployment, sluggish retail sales and what turnaround expert William Brandt calls "a nice, long slowdown in the economy."
"There will be more bank failures, more retail failures," predicted Brandt, president of the Development Specialists financial consultancy in Chicago. "We're looking at a tough 2009."
* For Lehman:
Lehman Bros. was forced into bankruptcy after Barclays PLC and Bank of America backed away from possible takeovers over the weekend. With the federal government unwilling to provide capital, Lehman had nowhere to turn with its $613 billion in debt but Chapter 11. Just days earlier, the company had announced a $3.9 billion loss and sweeping restructuring that highlighted its fatal exposure to real estate markets. While Lehman's name may disappear, rivals will clamor for crown jewels such as its Neuberger-Berman asset management arm and landmark headquarters tower on New York's Seventh Avenue.
* For Merrill:
The biggest U.S. consumer bank, Bank of America, ponied up $50 billion in stock for Merrill Lynch, rescuing it from its toxic portfolio of subprime-mortgage securities. BofA gets a sales force known as the "thundering herd" - more than 16,000 brokers - and a powerful brand name in retail brokerage.
* For those on the sidelines:
Few Americans have a direct connection to the events unfolding on Wall Street, but practically everyone has a stake in the game. The unwinding of Lehman's credit-default swaps may seem irrelevant to most people, for instance, but ultimately it could hurt the mutual funds in their 401[k]s. "Everything's connected to everything else," said David Oser, chief economist at ShoreBank in Chicago. "That's why this is so complicated. It's a real witch's brew."
The Associated Press contributed to this article.