Largest daily loss of 2008 as financials sink

Small-cap stocks collapsed Monday, generating the largest one-day decline of the year as investors seemingly lost confidence in the financial arena and their wrath was felt throughout nearly every corporate endeavor in the country. The Russell 2000 (NYSE:IWM) shed 30.50, or 4.23%, to 689.76, the lowest daily close since mid-July.

Just a month ago, small caps came within a whisker of moving into positive territory for the year. Now, the Russell is down 9.9% for 2008, while the Dow is off 17.6% for the year after tumbling 4.4% Monday and the S&P 500 is down 18.7% on the year, while shedding 4.6% Monday.

The headline news this morning was that the nation’s fourth-largest investment bank, Lehman Brothers Holdings Inc. (NYSE:LEH), would declare bankruptcy as the firm simply could not raise enough capital to counter massive losses tied to the credit crisis. This time around, the Federal government decided to let Lehman’s fate be decided by true market forces rather than to step in for yet another taxpayer infused bailout of a financial firm. The realization that Uncle Sam’s pockets only run so deep for these institutions mired in mountains of bad debt jolted shares in major financial corporations. American International Group Inc. (NYSE:AIG) seems to have assumed the unenviable position of the next firm with a target on its back — sinking 56% today, adding to massive losses already pinned on the firm in recent weeks.

News that the second-largest bank — Bank of America Corp. (NYSE:BAC) — would purchase massive investment bank Merrill Lynch & Co. (NYSE:MER) for some $50 billion was good news to MER, which rallied some 4%, but not necessarily embraced by BAC shareholders as the bank’s shares slumped 19%.

This September swoon has to be making market watchers long for the days when the biggest worries centered on whether or not crude oil prices were going higher. If you would have predicted six weeks ago that the stock market would fall apart while crude oil was busy losing nearly 50% of it’s value, people would have thought you were nuts. Not only has that come to fruition, but today’s epic collapse took hold . . .

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