P2JW26007D-5-A00100-10000F7FFFF ***** C M Y K Composite 09/16/2008 AZ,EE,MW,NY,SC,SW,WE BG,BM,CH,CK,DA,DE,DM,DN,FW,HL,HW,LG,NA,NM,OR,PA,RI,RO,SB,SH,TU,UT,WO P2JW26007D-5-A00100-10000F7FFFF Visit WSJ.com to See Our New Look and Features DJIA 10917.51 t 504.48 –4.4% HHHH $2.00 T U E S DAY, S E P T E M B E R 1 6 , 2 0 0 8 ~ VO L . C C L I I N O . 6 5 * * * * * 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 Center: Gabriele Stabile for The Wall Street Journal, Associated Press By Matthew Karnitschnig, Liam Pleven And Serena Ng 11500 DJIA t 504.48 11400 One-minute intervals 11300 11200 11100 11000 10900 10 11 noon 1 2 3 4 Bottom: Reuters, DPA/Landov, Robert Caplin for The Wall Street Journal ternational Group Inc. turned to the Federal Reserve and the state of New York for assistance. 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 wererattled by the rushed sale Sunday of Merrill Lynch & Co. and the bankruptcy-court filing of Lehman Brothers Holdings Inc., which scrambled Monday to sell its most-prized businesses before toomany employees and customers walk out the door. (Please see related article on Page C1.) All day Monday, top Lehman officials were huddled in Manhattan at their Seventh Avenue headquarters negotiating a sale of the U.S. investment bank—the core part of Lehman—to Barclays PLC of the U.K. People involved in the discussions were increasingly hopeful late Monday that a deal would be struck. In stock markets from Sydney to London to New York, the news was greeted with immediate sell- AIG Faces Cash Crisis As Stock Dives 61% Source: WSJ Market Data Group Top: Associated Press, Reuters, Associated Press By Susanne Craig, Jeffrey McCracken, Jon Hilsenrath and Deborah Solomon ing. For much of the day, the major U.S. market indexes were down 2%, which, while a goodsized decline, was smaller than many had thought would be the case. But in the final hour of trading, a wave of selling hit, driven by concerns about the fate of AIG.The Dow Jones Industrial Average ended down 504.48 points on Monday, off 4.4%, at its daily low of 10917.51, down 18% on the year. Of the Dow industrials’ 30 components, all but one—CocaCola Co.—fell, led by a 60.8% plunge in AIG. In Europe, London’s FTSE 100 index dropped 3.9%. Several Asian markets, including Japan and China, were closed Monday due to holiday. By Tuesday, Tokyo shares were down 5.1% in early trading, and Hong Kong’s Hang Seng index was down 6.1%. Monday’s action was the latest fallout in a widening financial crisis that began a year ago with the fall of American housing prices and is now reordering the U.S. financial system. Steps unveiled by the Federal Reserve to expand its emergency lending arsenal did little to snap the sense of gloom. Plenty of potential land mines remain. Banks are increasingly hoarding cash, curbing lending at a time when the economy is slowing. They are also starting to dump assets to raise 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. Old-School Banks Emerge What’s News– Atop New World of Finance i i i i Business&Finance World-Wide IG was facing a severe cash crunch as its credit ratings were cut, forcing the giant insurer to raise $14.5 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 Most Houston residents remained without power. About four million households couldn’t run air conditioning, 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 deathswereblamedonthe storm,mostintheMidwest. A12 The situation continued to be dire along the coast and especially on Galveston Island, whichtook adirect hit fromIke. 7 A 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 n House Democrats plan to push for action on a $50 billion stimulus package that focuses on infrastructure. A6 n Oil fell 5.4% to $95.71, the first close below $100 since March. Prices are expected to soften further as investors turn away from commodities. A12 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 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 n KB Home’s former CEO agreed to pay more than $7 million to settle SEC charges that he backdated his stock options to boost his pay. B1 n 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 A female suicide bomber killedatleast22peopleinIraq’s Diyala province. Car bombings in Baghdad killed 13 more. A20 Economic fallout in New York and London .......A3 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 n n Keeping Their Powder Dry: Draft Boards Hang On, Just in Case n Israel’s foreign minister appears to be the top party’s leading candidate to succeed Olmert as prime minister. A18 Thailand’s ruling party chose ousted leader Thaksin’s brother-in-law as its nominee to become prime minister. A18 i n n Obama’s health-care plan would cover more people than McCain’s but would cost more, two new reportsconclude. A21 Died: Richard Wright, 65, Pink Floyd founding member andkeyboard player, of cancer. n WSJ.com unveils its redesign with expanded news, new features including Journal Community and Management section, and improved navigation to it all. More enhancements are rolling out in the coming months. CONTENTS Campaign ’08 ...........A21 Career Journal ...........D6 Corporate News .....B2,7 Currents ......................A22 Health ..........................D1,5 Leisure & Arts ..........D11 Media & Mkting .......B9 Opinion .................A23-25 Personal Finance ...D1,3,4 Technology ................B5,6 Travel ............................D1,2 Weather Watch .....D12 Who’s News .................B8 s Copyright 2008 Dow Jones & Company. All Rights Reserved less lucrative for shareholders. Banks are heading “back to basics—to, if you like, the core purpose of the system with less bells and whistles,” says Douglas Flint, finance chief at HSBC Holdings PLC and co-chair of the Counterparty Risk Management Policy Group,ataskforceoffinanceexecutives 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. DeutscheBank,whichhadbeenfocusedonbuildingitsglobalinvestment-banking business, last week agreed to pay nearly Œ3 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,whichalsowooedPostbank, paid £1.26 billion ($2.26 billion)inJulyfortroubledU.K.mortgage lender Alliance & Leicester. The shift reflects a broader rePlease turn to page A10 Crisis on Wall Street n NATO envoys demanded Russia withdraw from Georgia but made no promise of faster membership for Tbilisi. A20 New on WSJ.com > More than 200 years after it was born at the base of a buttonwood tree, Wall Street as we have known it is ceasing to exist. The rapid demise of 158-yearold 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- 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 Mugabe agreed to a deal that would make opposition leader Tsvangirai Zimbabwe’s prime minister. A16 group Inc., combined the two. Now, as many securities firms are consumed in the wake of a disastrous foray into financial wizardry,thebalanceofpowerisshifting.Onthewanearetheheavyborrowing 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, havebeenacquiredbybigdeposittakinginstitutions,BankofAmerica 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 mostpowerfulplayersinanindustry that is likely to be safer but By Carrick Mollenkamp And Mark Whitehouse n Bush sought to reassure 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 7 Robert Caplin for the Wall Street Journal i 7 i i Preparedness Includes Enlisting Volunteers To Hear the Pleadings of Fake Objectors 7 ing citizens to sit on draft boards that may never be activated, at a MUSTANG, Okla.—Draft time when most Americans boardsareforgotten,butnotgone. don’t know such things exist, all Thirty-five years have passed while the U.S. is fighting wars on since the last American man two fronts. Should Congress decide to restood before his local draft board instate the draft, the Seand asked to be excused lective Service would from military service. have 190 days to start But in case the draft redelivering draftees to turns, the Selective Serthe military. To be previce System is still repared, the agency has locruiting civilians to decal draft boards picked, termine which contrained and ready to scripts deserve a pass pass judgment on those from Uncle Sam. who claim to be consci“Thedraft isaninsurentious objectors, minance policy,” said Oklaisters or others eligible homa Army National for deferments or exGuard Maj. Greg Park, Greg Park emptions. as 15 volunteers raised So far, Congress has their right hands and 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 repeatfense for our country.” edly proposed legislation manThe Selective Service System dating military or civilian serPlease turn to page A10 has the awkward task of persuad- By Michael M. Phillips BORN TO PERFORM. NEW XEON® 7400 SETS PERFORMANCE RECORDS AT IBM. Xeon offers best-in-class virtualization and leading performance with the first industry standard server delivering more than 1 million database transactions per minute. Learn more at intel.com/inside GREAT COMPUTING STARTS WITH INTEL INSIDE. ©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. P2JW26007D-5-A00100-10000F7FFFF i American International Group Inc. was facing a severe cash crunch last night as ratings agencies cut the firm’s credit ratings, forcing the giant insurer to raise $14.5 billion to cover its obligations. With AIG now tottering, a crisis that began with falling home prices and went on to engulf Wall Street has reached one of the world’s largest insurance companies, threatening to intensify the financial storm and greatly complicate the government’s efforts to contain it. The company, whose stock fell 61% yesterday, is such a big player in insuring risk for institutions around the world that its failure could shake the global financial system. AIG has been scrambling to raise as much as $75 billion to weather the crisis, and people close to the situation said that if the insurer doesn’t secure fresh 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 to step in, preferring instead to broker a private-sector solution. The Federal Reserve hosted a meeting to discuss AIG’s prospects at the central bank’s offices 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. Thecompanyturnedtothegovernment 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 5888425 The convulsions in the U.S. financial system sent markets across the globe tumbling, as two of Wall Street’s biggest firms looked set to exit the scene and insurance titan American In- Composite CYAN BLACK YELLOW MAGENTA