TORONTO - North American markets sustained heavy losses Monday after insurer American International Group Inc. rattled already shaky investor confidence with the biggest quarterly corporate loss in U.S. history -- US$61.7 billion.
"I think it's the magnitude people are surprised at," said Gareth Watson, Canadian equity adviser at Scotia Capital.
"They're not surprised by the fact they lost billions of dollars; everyone knew that was coming -- maybe not $61 billion, though. People wonder: Who is next? What is next? What's to come? And we have months of this weakness ahead of us."
The AIG loss included US$7.2 billion in unrealized losses and credit valuation adjustments at AIG Financial Products, the source of credit-default swaps, and pre-tax losses of US$21.6 billion on the declining value of AIG's investments.
The Toronto's S&P/TSX composite index dropped 435.51 points or 5.35 per cent to 7,687.51, its worst level since the fall of 2003. The Dow Jones industrial average fell 299.64 points or 4.25 per cent to 6,763.29, plunging below 7,000 for the first time in more than 11 years.
The U.S. government said it will give AIG another US$30 billion in loans, in addition to US$150 billion it has already given the ailing insurer. It's the fourth time the government has stepped in to help AIG -- once the world's largest insurer -- since September.
Making things worse on Toronto's heavily energy weighted stock index was a big plunge in the price of oil.
The Toronto energy sector sagged more than eight per cent as the April crude contract on the New York Mercantile Exchange fell $4.47 to US$40.29 a barrel on expectations of widening and deepening economic weakness.
Meanwhile, Statistics Canada reported the Canadian economy shrank at an annualized rate of 3.4 per cent in the fourth quarter.
"Even with the sharp decline in fourth-quarter GDP, the current quarter is expected to show an even deeper setback," said BMO Capital Markets economist Doug Porter.
"Canada's recession began in earnest early in the fourth quarter."
The contraction worsened toward the end of 2008, with gross domestic product declining one per cent in December.
Bad as it was, it didn't surprise investors -- who were already expecting a slightly worse showing -- and was likely not a big factor in the selloff Monday, Watson said.
"It's probably more likely due to the weakness we are seeing in the U.S. and the catalyst from (U.S.) markets heading lower last week."
The Canadian dollar lost 1.16 cents to 77.44 cents US a day before the Bank of Canada makes its next announcement on interest rates. Economists say it could cut by half a point, which would bring the central bank's key rate down to 0.5 per cent.
The TSX Venture Exchange was off 33.42 points to 828.24.
In New York, the Nasdaq composite index lost 54.99 points to 1,322.85 while the S&P 500 index declined 34.27 points to 700.82.
Elsewhere in the financial sector, HSBC PLC, Europe's largest bank by market value, reported a 70 per cent drop in 2008 net profit to US$5.7 billion and said it would raise US$17.7 billion in shares while cutting 6,100 jobs in America. In New York, HSBC Holdings fell $6.55 or almost 19 per cent to US$28.25.
Also weighing on investor sentiment is an assessment by billionaire Warren Buffett that the American economy "will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."
Buffett's insurance and investment company, Berkshire Hathaway Inc., reported during the weekend that it had its worst year ever in 2008.
Investors also braced for dreadful employment news at the end of the week. Economists project the American economy shed at least 640,000 jobs during February.
"As bad as things are, they can still get worse, and get a lot worse," said Bill Strazzullo, market strategist for Bell Curve Trading.
Strazzullo said there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000 unless the U.S. housing market can stabilize.
The TSX financial was down 4.45 per cent. Scotiabank lost $1.68 to $27.03 and CIBC (TSX:CM) fell $2.90 to $40.25. Royal Bank of Canada (TSX:RY) shed 95 cents to $29.97, and insurer Manulife Financial (TSX:MFC) fell $1.32 to $11.58.
EnCana Corp. (TSX:ECA) fell $3.13 to $47.07 and Suncor Inc. (TSX:SU) stepped back $2.71 to $23.75.
Losses cut across all sectors on the TSX. Research In Motion Ltd. (TSX:RIM), down $2.94 to $47.90 ; Potash Corp. (TSX:POT), off $9.98 to $96.80; and Bombardier Inc. (TSX:BBD.B), lower by 41 cents to $2.55.
