NEW YORK - The misery worsened on Wall Street Tuesday, with stocks piling on the losses late in the session and bringing the two-day decline in the Dow Jones industrials to more than 875 points amid escalating worries about credit markets and financial sector. The Dow lost more than 500 points and all the major indexes slid more than 5 percent.
Steps by the Federal Reserve to reinvigorate the dormant credit markets ultimately weren't enough to calm nervous investors. News about financial companies only added to their despondent mood.
"The calls I'm getting — every money manager I deal with, and every client I talk to — are just very emotional. This is a very, very emotional time, and most of them are taking steps to shore up their defenses, reducing exposure to stocks just to defend their portfolios," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.
Meanwhile, Federal Reserve Chairman Ben Bernanke warned in a speech Tuesday that the financial crisis could prolong the difficulty the economy is facing. While his remarks were widely regarded as a sign that an interest rate cut could be in the offing, Wall Street appeared little comforted and focused on his downbeat assessment of the economy.
Earlier, the Fed announced plans to buy massive amounts of corporate debt to jump-start lending in the markets where many companies turn for short-term loans called commercial paper. The evaporation of faith that loans will be repaid has lenders weary and is making it more difficult and expensive for businesses and consumers to borrow.
The credit markets did show some slight signs of easing as demand for safe-haven investments decreased, though that seemed to offer little comfort to investors still worried about the decreased levels of lending and their impact on the overall economy. The markets seized up last month after Lehman Brothers Holdings Inc. declared bankruptcy and the government stepped in to rescue insurer American International Group Inc.
The Fed's latest move to lubricate the credit markets stops short of a broad interest rate reduction that some investors say is necessary to restore confidence in the market. Other market watchers argue, however, that more focused steps like Fed's decision to buy commercial paper are what's needed.
But investors remained worried about financial companies like Bank of America Corp., which fell after slashing its dividend and reporting that its third-quarter profit fell 68 percent. The stock fell $8.45, or 26 percent, to $23.77 Tuesday. It was by far the steepest decliner among the 30 stocks that comprise the Dow industrials.
And a rumor that Mitsubishi UFJ Financial Group Inc. was pulling out of a deal to acquire up to 24.9 percent of the voting shares of Morgan Stanley sent the investment bank's stock tumbling $5.85, or 25 percent, to $17.65. The companies denied the rumor, but the Street was panicky enough that it still sent Morgan Stanley and other financials tumbling.
Investors are fearful that financial companies will continue to face cash shortages even with efforts in Washington and by other governments to resuscitate lending.
"It's such a widespread loss of confidence and, to some extent, a race for the exits," Johnson said.
Stocks ended lower for the fifth straight session. According to preliminary calculations, the Dow fell 508.39, or 5.11 percent, to 9,447.11. The drop came a day after the blue chips fell below 10,000 for the first time in four years. The Dow skidded as much as 800 points on Monday before finishing with a loss of 370.
Broader indexes also fell. The Standard & Poor's 500 index declined 60.66, or 5.74 percent, to 996.23, while the Nasdaq composite index fell 108.08, or 5.80 percent, to 1,754.88.