Stocks Dive More Than 4% on Credit Fears

Updated from 4:04 p.m. EDT

U.S. stocks took another steep dive Wednesday after the Federal Reserve agreed to take over insurance giant AIG (AIG) and the financial sector was clubbed by new fears about credit.

The Dow Jones Industrial Average, just two days after shedding 504 points, fell 449.36 points, or 4.1%, to 10,609.66. The S&P 500 slumped 57.20 points, or 4.7%, to 1156.39, and the Nasdaq tumbled 109.05 points, or 4.9%, to 2098.85.

Worries about the financial sector were central to the day's massive declines. After trading closed Tuesday, the Fed reversed its earlier decision and agreed to offer AIG (AIG) an $85 billion bridge loan to bail out the company. In exchange, the government will essentially get a 79.9% equity position in AIG and will charge a hefty interest rate.

Treasury Secretary Henry Paulson also stipulated that AIG CEO Robert Willumstad leave the company. Edward Liddy, former CEO of Allstate (ALL), will replace Willumstad. AIG shares dropped 45% to $2.05.

"I think the problems at AIG are just so deep and so extensive that it was beyond the private sector to take care of it," said Maryann Hurley, vice president of fixed income trading at DA Davidson. After Bank of America's (BAC) acquisition of Countrywide and Merrill Lynch (MER), she said, the private sector would have a hard time swallowing AIG. The choice was to either bail out AIG or allow it to fail, which would have badly shaken the financial system, she said.

However, the AIG bailout doesn't mean the crisis is over. "It would be, I think, not prudent to believe that there aren't other problems out there," said Hurley.