RENEE MONTAGNE, Host:

This is Morning Edition from NPR News. I'm Renee Montagne.

STEVE INSKEEP, Host:

And I'm Steve Inskeep, good morning. This is a moment when some of the nation's surviving banks are looking for safety. Several banks are said to be considering mergers. They're doing that after another dismal day on Wall Street and in financial markets around the world. The Dow Jones Industrial Average lost 450 points yesterday, and that happened even after the government announced the bailout of a giant insurance firm. NPR's Jim Zarroli begins our coverage.

JIM ZARROLI: Bush administration officials had hoped that their extraordinary rescue of AIG would buy the company some time to get its financial house in order, and in the process bring a little calm to the markets. Alas, that didn't happen. There were questions right away. What if even $85 billion was insufficient to clean up AIG's toxic balance sheet? And why had AIG merited a taxpayer-funded bailout when Lehman Brothers was left to die. White House spokesman Dana Perino defended what was the largest intervention in the market by the Fed ever.

DANA PERINO: The market has had a lot of information to digest over the past several days. It's going to take a little bit of time for us to see where this goes, but I think the collective judgment of most people today is that the action they took last night on AIG was the right one.

ZARROLI: And we're now starting to get indications of the massive impact that this week's bailouts are having on the federal Treasury. The Treasury Department said it would sell 40 billion dollars worth of debt on behalf of the Federal Reserve to pay for the bailouts. Economist Sung Won Sohn of California State University at Fullerton says the U.S. can ultimately raise the money it needs to pay for the bailouts. But he says all of the bailouts are creating the perception that the U.S. financial system may be overextended, and that may be causing foreign investors to pull their money out of the country.

SUNG WON SOHN: The Federal Reserve and U.S. Treasury always had been the kind of the rock of Gibraltar. And now it seems that people are beginning to wonder, you know, is it really as strong as we thought it was?

ZARROLI: Even as the details of the AIG bailout were emerging, new troubles were cropping up. Morgan Stanley reported solid profits for the current quarter, but its share price got thrashed anyway, falling 24 percent. So too did shares of Goldman Sachs. To Michael Mussa, senior fellow at the Peterson Institute for International Economics, the havoc in the markets right now is a little mystifying.

MICHAEL MUSSA: The turmoil that we've seen in financial markets is sort of way disproportionate to what appears to be the underlying weakness in the economy. So there's something dysfunctional about the way in which financial markets, particularly in the U.S., but also elsewhere, have been behaving.

ZARROLI: As the day went on, the stocks continued to fall. The price of gold, which is seen as a safe investment in anxious times, rose at a record rate. One problem driving stocks down was the sharp spike in what's called the London Interbank Offered Rate, that's the rate that banks charge each other to borrow money. And it tends to rise when confidence in the economy is waning. Mussa says the effect it has on the economy is like having a heart attack.

MUSSA: If that goes on for a significant period of time, it's very worrying. It's sort of the financial market equivalent of ventricular fibrillation.

ZARROLI: With financial stocks down, rumors were flying about bank deals. Several published reports said Morgan Stanley was in preliminary talks to be acquired by the banking giant Wachovia. Another said the country's largest savings and loan, Washington Mutual, wants to put itself up for auction. None of the companies involved would comment. But in a week that's already seen the demise of Merrill Lynch and Lehman Brother's, it's clear many financial companies are looking for all the protection they can find, even if it means getting folded into a larger bank. Jim Zarroli, NPR News, New York.

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