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DJIA 10917.51 t 504.48 ?4.4% NASDAQ 2179.91 t 3.6% NIKKEI Closed(12214.76) DJ STOXX 50 2744.81 t 4.0% 10-YR TREAS s 2 3/32, yield 3.482% OIL $95.71 t $5.47 GOLD $783.10 s $22.80 EURO $1.4310 YEN 104.88

AIG, Lehman Shock Hits World Markets

Focus Moves to Fate of Giant Insurer After U.S. Allows Investment Bank to Fail; Barclays in Talks to Buy Core Lehman Unit

The convulsions in the U.S. fi- ing. For much of the day, the ma-

nancial system sent markets jor U.S. market indexes were across the globe tumbling, as down 2%, which, while a goodtwo of Wall Street's biggest sized decline, was smaller than

AIG Faces

firms looked set to exit the scene many had thought would be the and insurance titan American In- case. But in the final hour of trad-

ing, a wave of selling hit, driven

Cash Crisis

By Susanne Craig, Jeffrey McCracken,

by concerns about the fate of AIG.The Dow Jones Industrial Av-

As Stock

Jon Hilsenrath and

erage ended down 504.48 points

Deborah Solomon

on Monday, off 4.4%, at its daily low of 10917.51, down 18% on the

Dives 61%

ternational Group Inc. turned to year. Of the Dow industrials' 30

the Federal Reserve and the components, all but one--Coca-

By Matthew Karnitschnig,

Top: Associated Press, Reuters, Associated Press Center: Gabriele Stabile for The Wall Street Journal, Associated Press Bottom: Reuters, DPA/Landov, Robert Caplin for The Wall Street Journal

state of New York for assistance. Cola Co.--fell, led by a 60.8%

11500

Liam Pleven

The U.S. stock market suffered its worst daily point plunge since the first day of trading after the Sept. 11, 2001, terrorist attacks. Financial markets wererat-

plunge in AIG. In Europe, London's FTSE

100 index dropped 3.9%. Several Asian markets, including Japan and China, were closed Monday

11400 11300 11200

DJIA t 504.48

One-minute intervals

And Serena Ng

American International Group Inc. was facing a severe cash crunch last night as ratings

tled by the rushed sale Sunday of due to holiday. By Tuesday, To-

11100

Merrill Lynch & Co. and the bank- kyo shares were down 5.1% in

agencies cut the firm's credit ratings, forcing the giant insurer to

ruptcy-court filing of Lehman early trading, and Hong Kong's

11000

raise $14.5 billion to cover its ob-

Brothers Holdings Inc., which scrambled Monday to sell its most-prized businesses before toomany employees and custom-

Hang Seng index was down 6.1%. Monday's action was the lat-

est fallout in a widening financial crisis that began a year ago

10900 10 11 noon 1 2 3 4

Source: WSJ Market Data Group

ligations. With AIG now tottering, a cri-

sis that began with falling home prices and went on to engulf Wall

ers walk out the door. (Please see with the fall of American hous-

Street has reached one of the

related article on Page C1.)

ing prices and is now reordering

world's largest insurance compa-

All day Monday, top Lehman the U.S. financial system. Steps

nies, threatening to intensify the

officials were huddled in Man- unveiled by the Federal Reserve

financial storm and greatly com-

hattan at their Seventh Avenue to expand its emergency lend-

plicate the government's efforts

headquarters negotiating a sale ing arsenal did little to snap the

to contain it. The company,

of the U.S. investment bank--the sense of gloom.

whose stock fell 61% yesterday, is

core part of Lehman--to Bar-

Plenty of potential land

such a big player in insuring risk

clays PLC of the U.K. People in- mines remain. Banks are increas-

for institutions around the world

volved in the discussions were in- ingly hoarding cash, curbing

that its failure could shake the

creasingly hopeful late Monday lending at a time when the econ-

global financial system.

that a deal would be struck.

omy is slowing. They are also

AIG has been scrambling to

In stock markets from Sydney starting to dump assets to raise

raise as much as $75 billion to

to London to New York, the news was greeted with immediate sell-

capital. A mass sale of assets by Please turn to page A2

Traders around the world react to sharp selloffs after one of the most turbulent days in Wall Street's history.

weather the crisis, and people close to the situation said that if

the insurer doesn't secure fresh

What's News?

iii

7 Business&Finance

iii

World-Wide 7

Old-School Banks Emerge

Atop New World of Finance

By Carrick Mollenkamp

group Inc., combined the two. less lucrative for shareholders.

funding by Wednesday, it may have no choice but to opt for a bankruptcy-court filing.

"The situation is dire," a person close to AIG said.

Many market participants have been anticipating a government-led rescue. So far, however, the U.S. has been reluctant

And Mark Whitehouse

Now, as many securities firms

Banks are heading "back to ba- to step in, preferring instead to

A IG was facing a severe n Most Houston residents cash crunch as its credit remained without power.

are consumed in the wake of a di- sics--to, if you like, the core pur- broker a private-sector solution.

More than 200 years after it sastrous foray into financial wiz- pose of the system with less bells

The Federal Reserve hosted a

ratings were cut, forcing the About four million house-

was born at the base of a button- ardry,thebalanceofpowerisshift- and whistles," says Douglas Flint, meeting to discuss AIG's pros-

giant insurer to raise $14.5 holds couldn't run air condi-

wood tree, Wall Street as we ing.Onthewanearetheheavybor- finance chief at HSBC Holdings pects at the central bank's offices

billion to cover its obligations. AIG's shares fell 61% on a day when financial markets in the U.S. and around the world were rattled by the rushed sale of Merrill Lynch and the bankruptcy-court filing of Lehman. A1, C2, C16 n Lehman was negotiating a last-minute plan to sell large portions of itself to Barclays, the U.K.'s third-largest bank. C1 n The Dow industrials fell 504.48 points, or 4.4%, to 10917.51, its lowest close in over two years, as financials slid and investors sought bonds. C1, C10

n Fed officials aren't inclined to veer from plans to hold short-term rates steady at Tuesday's meeting. A4 n Central banks around the world pumped cash into money markets amid the turmoil on Wall Street. Expectations are rising that rates will be cut. A8

n The balance of power in the banking industry is shifting to the old-fashioned business of chasing customer deposits and building branch networks. A1 n A big regulatory overhaul that had been under discussion could go beyond oversight of investment banks. A10

n Oil fell 5.4% to $95.71, the first close below $100 since March. Prices are expected to soften further as investors turn

tioning, turn on lights or refrigerate food in the wake of Hurricane Ike, and officials voiced concern about public health and sanitation. Refineries, chemical plants and other businesses couldn't return to operation. More than 30 deaths were blamed on the storm, most in the Midwest. A12

The situation continued to be dire along the coast and especially on Galveston Island, whichtook adirect hit fromIke.

n Bush sought to reassure the public and investors that markets remain sound despite the financial crisis. A6 n The economies of London and New York are likely to be hit hard by the loss of financial-services jobs. A3

n House Democrats plan to push for action on a $50 billion stimulus package that focuses on infrastructure. A6

n Mugabe agreed to a deal that would make opposition leader Tsvangirai Zimbabwe's prime minister. A16

n A female suicide bomber killed at least 22 people in Iraq's Diyala province. Car bombings in Baghdad killed 13 more. A20

n Iran has blocked a U.N. nuclear-arms investigation and the probe is now ata dead end, the IAEA said in a report. A20

Robert Caplin for the Wall Street Journal

have known it is ceasing to exist. The rapid demise of 158-year-

old investment bank Lehman Brothers Holdings Inc., together with the takeover of 94-year-old Merrill Lynch & Co., represents a watershed in the banking industry's biggest restructuring since the Great Depression.

For decades, the world of banking was divided largely into two kinds of businesses. Commercial banks took deposits and made loans, eking out a decent return under the burden of heavy regulations designed to protect depositors. Standalone securities firms such as Lehman, Merrill and the now-defunct Bear Stearns Cos. took no deposits and were lightly regulated, freeing them to take big risks and make fat profits at the cost of occasional losses. More recently, some of the biggest institutions, such as UBS AG and Citi-

rowing and complex securities that financiers embraced in recent years. On the rise is a more old-fashioned business of chasing customer deposits and building branch networks, conducted with the backing of federal insurance programsto keepdepositors from pulling out en masse.

Of the five major independent investment banks that existed a year ago, only two--Goldman Sachs Group Inc. and Morgan Stanley--remain standing. Two others, Merrill and Bear Stearns, have been acquired by big deposittaking institutions, Bank of America Corp. and J.P. Morgan Chase & Co. Othergiantcommercial-banking players, such as Wells Fargo & Co. in the U.S., as well as Germany's Deutsche Bank AG and Spain's Banco Santander SA, have emerged as some of the most powerful players in an industry that is likely to be safer but

PLC and co-chair of the Counterparty Risk Management Policy Group, a task force of finance executives working on a framework to prevent systemic financial shocks. "There is a recognition that when the dust settles...the construct of the industry will be different."

Evidence of the new importance of bread-and-butter banking is appearing around the globe. Deutsche Bank, which had been focused on building its global investment-banking business, last week agreed to pay nearly OE3 billion ($4.3 billion) in a two-stage deal to acquire the 850 domestic branches of Deutsche Postbank AG, the retail banking arm of the German postal system. Santander, which also wooed Postbank, paid ?1.26 billion ($2.26 billion) in July for troubled U.K. mortgage lender Alliance & Leicester.

The shift reflects a broader rePlease turn to page A10

Crisis on Wall Street

n Economic fallout in New York and London .......A3 n McCain, Obama campaigns react ..................A21 n Goldman and Morgan Stanley come under pressure

as fears continue ..........................................C1 n What brokerage clients of Merrill and Lehman

Brothers can expect .......................................D1

inNew York onMonday with company executives, bankers as well as state and federal officials.

With strong encouragement from the Fed, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are seeking to raise $70 billion to $75 billion in loans to help prop up AIG, according to people familiar with the situation. Word of AIG's efforts to borrow that much sent the stock market tumbling in the last hour of trading.

The company turned to the government in earnest after a weekend where intense efforts failed to produce a plan to raise roughly $40 billion in capital. The worsening crisis has now forced the firm to seek considerably more, underscoring its precarious position. AIG needs the money to sidestep a potentially fatal downgrade by credit-rating firms.

The downgrades by Moody's Investors Service and Standard & Poor's mean that AIG's counterparties, or trading partners, can demand that it post an additional $14.5 billion in collateral, according to a filing AIG made with the Securities and Exchange Commission in August. It is not clear how quickly AIG would have to produce those funds. In addition, AIG or its counterparties could demand early termination based on the

Please turn to page A8

away from commodities. A12 n NATO envoys demanded

n H-P is cutting 24,600 jobs as part of its plan to integrate EDS and will record a $1.7 billion restructuring charge. B1

Russia withdraw from Georgia but made no promise of faster membership for Tbilisi. A20

n Israel's foreign minister

Keeping Their Powder Dry: Draft Boards Hang On, Just in Case

n KB Home's former CEO agreed to pay more than $7 million to settle SEC charges

appears to be the top party's leading candidate to succeed Olmert as prime minister. A18

iii

Preparedness Includes Enlisting Volunteers

BORN TO

that he backdated his stock options to boost his pay. B1

n Germany's BASF launched a friendly offer to buy Ciba, a Swiss specialty chemicals maker, for almost $3 billion. B2

n A plan to rescue Alitalia was partially revived as some labor unions signed a draft deal with the group seeking control of the carrier. B2

n Thailand's ruling party chose ousted leader Thaksin's brother-in-law as its nominee to become prime minister. A18

n Obama's health-care plan would cover more people than McCain's but would cost more, two new reportsconclude. A21

n Died: Richard Wright, 65, Pink Floyd founding member andkeyboard player, of cancer.

7 To Hear the Pleadings of Fake Objectors 7

By Michael M. Phillips

MUSTANG, Okla.--Draft boards are forgotten, but not gone.

Thirty-five years have passed since the last American man stood before his local draft board and asked to be excused from military service. But in case the draft re-

ing citizens to sit on draft boards that may never be activated, at a time when most Americans don't know such things exist, all while the U.S. is fighting wars on two fronts.

Should Congress decide to reinstate the draft, the Selective Service would have 190 days to start

PERFORM.

New on

turns, the Selective Service System is still re-

delivering draftees to the military. To be pre-

unveils its redesign with expanded news, new features including

cruiting civilians to determine which conscripts deserve a pass

pared, the agency has local draft boards picked, trained and ready to

Journal Community and Management

from Uncle Sam.

pass judgment on those

section, and improved navigation to it all. More enhancements are rolling out

"Thedraft isaninsurance policy," said Oklahoma Army National

who claim to be conscientious objectors, ministers or others eligible

NEW XEON? 7400 SETS PERFORMANCE RECORDS AT IBM.

in the coming months.

>

CONTENTS

Media & Mkting .......B9

Campaign '08 ...........A21 Opinion .................A23-25

Career Journal ...........D6 Personal Finance ...D1,3,4

Corporate News .....B2,7 Technology ................B5,6

Currents ......................A22 Travel ............................D1,2

Health ..........................D1,5 Weather Watch .....D12

Guard Maj. Greg Park, as 15 volunteers raised

Greg Park

for deferments or exemptions.

their right hands and

So far, Congress has

swore in as draft-board mem- shown no appetite for the draft,

bers at a community center here. although Rep. Charles Rangel, a

"The draft is the last line of de- New York Democrat, has repeat-

fense for our country."

edly proposed legislation man-

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GREAT COMPUTING STARTS WITH INTEL INSIDE.

Leisure & Arts ..........D11 Who's News .................B8 s Copyright 2008 Dow Jones & Company. All Rights Reserved

The Selective Service System dating military or civilian ser-

has the awkward task of persuad-

Please turn to page A10

?2008 Intel Corporation. All rights reserved. Intel, the Intel logo, Xeon and Xeon Inside are trademarks of Intel Corporation in the United States and other countries.

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