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CNNMoney, “Another thrashing for stocks”

NEW YORK (CNNMoney.com) — Stocks plummeted Wednesday, with the Dow industrials falling 449 points in its second worst session of the year, as the government’s emergency rescue of AIG amplified fears about the stability of financial markets.

The Dow Jones industrial average (INDU) lost 449 points, or 4% and fell to the lowest level since November 2005. The Standard & Poor’s 500 (SPX) index lost 4.7% and fell to its lowest point since April 2005. The Nasdaq composite (COMP) lost 4.9% and ended at its lowest point since August 2006.

Selling pressure eased in the mid-afternoon as the jump in oil and gold prices boosted the underlying stocks. But any recovery attempt lost steam and the market finished the session just above the worst levels of the day.

After the close, a New York Times report said that Morgan Stanley (MS, Fortune 500) was considering a merger with Wachovia (WB, Fortune 500) or another bank.

Morgan Stanley (MS, Fortune 500) shares had tumbled 24% during the session on worries about its profits and ability to raise capital, even though the company announced better-than-expected quarterly results Tuesday night. Goldman Sachs (GS, Fortune 500) also slumped despite having reported better-than-expected results. (Full story)

Also after the close, a Wall Street Journal report said that Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) have expressed interest in Washington Mutual (WM, Fortune 500), the mortgage lender that has seen its business erode in the housing market collapse.

Financial stocks tumbled. The Philadelphia KBW Bank (BKX) index fell almost 8% and the Amex Securities Broker/Dealer (XBD) index fell over 10%.

Small cap stocks were hit, too, with the Russell 2000 (RUT) index sliding 4.8%.

The selloff comes in the wake of the government’s bailout of Fannie Mae and Freddie Mac, Lehman Brothers’ bankruptcy, Merrill Lynch’s sale to Bank of America and ongoing worries about Washington Mutual and other firms.

“There’s a fear of a financial system meltdown going on, and it’s grounded in the headlines we’re seeing about the series of firms that are in trouble,” said Paul Rabbit, president of Rabbit Capital Management.

Meanwhile, a measure of corporate borrowing costs surged to levels not seen since around the time of the crash of 1987, according to reports.

Stocks slumped Monday, with the Dow losing 504 points after Lehman Brothers declared bankruptcy and AIG plunged amid worries about its solvency. Stocks bounced a bit Tuesday when the Federal Reserve held interest rates steady, cooling fears that the economic outlook has deteriorated on the financial market crisis.

But the reprieve from the selling was a short one, with a broad-based selloff in place Wednesday.

Rabbit said stocks were also under seasonal pressures, with September typically the worst month of the year for the major gauges.

According to the Stock Trader’s Almanac, September has traditionally been the worst month for the Dow and S&P 500 since 1950, with the Dow averaging a loss of 1% during the month and the S&P 500 losing 0.6%. September has also been the worst month for the Nasdaq since its inception in 1971, averaging a loss of 0.9%.

By comparison, as of Wednesday’s close, the Dow is down 8.1% and the S&P 500 is down 6.4% in September, while the Nasdaq has fallen 11.3% month-to-date.

Year-to-date, all three major gauges are down more than 20%.

Bonds rallied, lowering the corresponding yields, as investors sought the comparatively safe haven of government debt. The dollar tumbled versus the yen and euro. Oil prices gained $6.01 a barrel and gold prices soared $70 an ounce.