STORY:
The Federal Reserve hoped by saving this --- it would avert this: more instability in the financial markets. But that's not what happened.
U.S. markets fell more than 4 percent early Wednesday as the market looked beyond the $85 billion federal lifeline to American International Group.
Art Hogan is chief investment strategist at Jefferies.
[Art Hogan, Investment Strategist]:
"AIG gets rescued and then it is today's - what is today's disaster du jour going to be? And there's contemplation or conversation about the next shoe to drop. So unfortunately we are in a cycle of disaster to just disaster, bouncing from disaster to disaster. And that's why the market, I think, can't get any legs."
There is also some concern AIG may need more than $85 billion loan to stay afloat.
And that fed into lingering fears the worst is not over for the global banking sector. A key international lending rate shot to historic highs. The London inter-bank offered rate, or LIBOR, suggests banks are reluctant to lend money to each other in case they need that cash to fight-off a run on the bank, Hogan adds.
[Art Hogan, Investment Strategist]:
"We haven't seen anything like this since the (19)50's. And its very, very bad. It shows a very, very tight credit market. That will fix itself when banks start realizing it's okay to be back in business and not hoarding their cash. That's not today."
And signs of the malaise are spreading. The Primary Reserve Fund, a money-market mutual fund, fell below $1 a share in net value -- money market funds are not supposed to drop below that mark.
Further exacerbating Wall Street jitters: the root of the problem - a weak housing market - offered no hope. New home construction projects tumbled to a 17-1/2 year low in August.
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