The Dow Jones industrial average fell below 7000 Monday, its lowest level in more than a decade, after world stocks took a dive and troubled insurance giant AIG posted the largest quarterly loss of any company in U.S. history.
American International Group lost $61.7 billion in the last three months of 2008 despite U.S. government efforts to prop up the ailing firm, the world's largest insurer.
The Treasury Department said Monday it would extend an additional $30 billion on an "as needed" basis to AIG after the Bush administration gave it $150 billion in taxpayer aid last year.
U.S. consumers, meanwhile, unexpectedly bought more in January after curbing their spending habits for six straight months amid the deepening recession. The increase, however, was expected to be temporary. Incomes were also up the most since May, thanks largely to pay raises for the military and civilian government employees.
The Dow's latest slide came on the heels of a 4 percent or larger drop in the European benchmark indexes. At 3 p.m. ET, the Dow continued to tumble, falling below 6800.
AIG's chairman and CEO, Edward Liddy, sought Monday to reassure Americans that his firm would not draw on the new $30 billion unless absolutely necessary. Despite the assurances, the government has warned that more bailout money could be needed.
Speaking to NBC's Today program, Liddy said: "We're going to be able to pay back the Federal Reserve. The new $30 billion is a standby line. It's not necessarily something that we think we'll have to draw on right away."
Treasury's latest effort is being described as an effort to stabilize the company and the financial system.
The government's action forestalls a likely downgrade in AIG's credit rating, which could have pushed the company into bankruptcy. Given AIG's numerous insurance customers and its ties to major financial institutions, the government said the potential cost of inaction, both to the economy and to the taxpayers, would have been extremely high.
"Today's actions were critical," he told reporters, adding that the "the risk of doing nothing was unacceptable."
Under the new package, instead of paying back $38 billion in cash with interest that AIG has used from a Federal Reserve credit line, the company will now repay that amount with equity stakes in Asia-based American International Assurance Co. and American Life Insurance Co., which operates in 50 countries.
Monday's announcement marked the fourth time the government has stepped in to help AIG since its initial lifeline was extended in September.
There was more bad economic news. Construction spending fell by 3.3 percent in January, the Commerce Department reported. That is more than twice as much as the 1.5 percent drop Wall Street economists surveyed by Thomson Reuters had been expecting.
Nonresidential construction fell by 4.3 percent, the biggest drop since January 1994, the department reported. Residential construction fell 2.9 percent.
Also Monday, the Commerce Department said that Americans spent 0.6 percent more in January, even better than the 0.4 percent gain that economists expected, while the personal savings rate surged to 5 percent — the highest level since 1995 — as wary consumers continued to save their cash.
Consumer spending accounts for about 70 percent of total economic activity. The January increase was driven by a sharp 1.3 percent rise in purchases of nondurable goods, led by much higher spending on food.
But analysts do not expect the trend to continue. Last week, the government reported that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 6.2 percent in the final three months of 2008. That was the sharpest fall in about 26 years.
Also Monday, the private Institute for Supply Management's index of national factory activity inched up to 35.8 in February from 35.6 the previous month. Manufacturers said the modest improvement in the headline index was likely due to the resumption of production at some auto plants after long holiday closures.
From NPR and wire service reports