– Yesterday’s drop in stocks erased more than $600 billion in value after the S&P 500 benchmark saw its worst day since 9/11. Financial stocks were worst hit. Financials in the S&P 500 declined the most since 1989. The biggest losses were in insurance giant AIG (NYSE:AIG), which plunged 61% and America’s biggest savings and loan bank Washington Mutual (NYSE:WM), which dropped 27%.

– The crisis on Wall Street could be felt all around the world this morning as global stock markets tumbled. Japan and South Korea, whose markets were closed for a holiday yesterday, saw the worst of the selling.

All eyes are on the drama being played out on Wall Street today. But the cause of all the bloodshed was the downturn in the US housing market. This left banks and financial institutions with exposure to toxic subprime loans with a load of worthless securities on their books. This led to writedowns and losses. And the rest is history. Shockingly, given the scale of the crisis, John Maudlin says the housing crisis has a ways to run yet. Alt-A mortgages may the next to fall…

Over the weekend the feds walked away from Lehman Brothers (NYSE:LEH), leaving it to file for Chapter 11.

This is how the real world works, says Bill Bonner. “When you can’t beg, borrow or steal the cash to pay your current obligations, you go bankrupt.”

The question now is how long the US can hold out as the greatest debtor the world has ever seen. And for how long America’s creditors are going to keep propping up the dollar. The sinking of Lehman and the lethal threats posed to the likes of AIG (NYSE:AIG) and WaMu (NYSE:WM) will severely test dollar holders’ confidence in the buck…

Gold and silver didn’t do much from the opening in the Far East until the London p.m. fix at 10 a.m. NY time. Then both began to rise from that point onward. Gold finished up $16.80 and silver was up 28 cents. I was underwhelmed, as the dollar finished down almost a full cent. However platinum and palladium had a stellar day…both doing much better than silver or gold. That’s because nobody has a thumb on their prices. However, the gold equities were on fire, so I’m thankful for that.

Kerry Killinger yesterday (Monday) was ousted from his position as Chief Executive Officer of Washington Mutual Inc. (WM), the biggest U.S. savings and loan, after a ceaseless torrent of mortgage-related losses resulted in a 90% decline in WaMu stock.

Whiskey and Gunpowder editor Dan Amoss says the recent rally in financial stocks has more to do with short covering than regular buying.

Weak institutions were shorted so much that a bounce was inevitable.

Despite an SEC clampdown on shorting, Dan says legitimate shorting is vital for the stock market and is not to blame for the stategic mistakes of U.S. banks.

For those still looking for new short ideas in the sector, Dan says Allied Capital (NYSE:ALD) is a good place to start…

The new ban by the Securities and Exchange Commission (SEC) on the naked short selling of 19 major financial firms sent banking stocks on a sharp rally after it was announced on July 15.

However, Sovereign Society Investment Director Eric Roseman says that by singling out 19 firms, the SEC has left hundreds more financial companies even more vulnerable. Washington Mutual (NYSE:WM), the largest US bank not included in the list, saw its share price plunge 35% last week.

Besides, poor financial supervision and weak government regulation created this mess in the banking sector, not short-selling hedge funds.

Silver and gold had some smallish gains in Far East trading on Friday morning, but once London opened, the upward momentum vanished…and then was extinguished the moment that the Comex (AMEX:IAU) in New York began trading. The bottom in both metals occurred shortly after 10 a.m. NY time. The ensuing rally lasted for a couple of hours before it flat-lined into the close in after hours trading on the Globex.

For years, investors have bemoaned the low dividend yield on stocks. But with the market down roughly 20%, the yield on the S&P 500 Index is up to 2.25%. That doesn’t sound terribly rich, I know, but it is only slightly less than the average money market is paying right now.

Gold pushed higher through the first hour of the New York session yesterday, peaking at $981, but then ran into some determined selling that sent it spiraling downward into the Globex, where it flatlined to finish at $959.30/oz., down $17.90. Overnight, gold has fallen further.

Platinum’s long slide was prolonged for another day, as the metal skidded from the last hour of NYMEX trading through the Globex to end at $1900/oz., down $60. Overnight, platinum has been flat.

Silver remained above $19 through the mid-morning hours, but faded from there, closing at $18.76/oz., down 13 cents. Overnight, silver is little changed.
(Click here for charts)

The precious metals took a trip south, as would have been expected as the usual suspects lined up uniformly…