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The worst day in the U.S. stock markets since Sept. 11, 2001, hammered the Alaska Permanent Fund Corp. on Monday, but left fund managers continuing to preach the value of diversification.

The venerable investment bank Lehman Bros. filed for bankruptcy, and shares the permanent fund earlier purchased for $47.35 were left trading at 21 cents each, wiping out almost all the value of stock it had purchased for several million dollars.

"I've had better days," said Mike Burns, executive director of the Alaska Permanent Fund, the state's oil revenue investment account.

Monday's stock market decline saw the Dow Jones Industrial Average lose more than 500 points, or 4.42 percent of its value.

That was not a surprise, however, coming after a weekend of financial turmoil when Lehman signaled its intent to declare bankruptcy, Merrill Lynch & Co. agreed to be taken over by Bank of America Corp. and the world's largest insurance firm, American International Group, teetered on the brink.

Investments in all three companies may wind up costing the Alaska Permanent Fund, to varying extents. Preliminary estimates of Monday's losses won't be made until mid-day today.

Burns, who began watching the carnage at 5 a.m. with other fund staff, said it could have been worse. When Bear Stearns failed and was taken over by JP Morgan earlier this year, the Federal Reserve Bank stepped in to support the deal.

Over the weekend, while Lehman executives tried desperately to find a buyer, the Federal Reserve this time stayed on the sidelines and let it fail.

"What that shows is how fragile the market was at that point in time. Now, there's an entirely different assessment," Burns said.

"It's still not a good place to be, but (the market) made miles of progress from where it was in the Bear Stearns days," he said.

Monday's market, including the travails of Lehman, Merrill Lynch and AIG, are likely to be costly to Alaska, he said.

When Bear Stearns was sold to JP Morgan for a nominal price, the fund lost much of its investments in the company's stock. The fund's holdings in Bear Stearns bonds, however, were backed by JP Morgan and the Federal Reserve.

Burns said that's not the case this time.

"This is a pure bankruptcy," he said, with shareholders' equity likely wiped out. Lehman corporate bonds will be traded for whatever value might be left.

"The equity is going, the bonds are well below junk level," he said.

"I would think between the two we would have in excess of $20 million lost."

The permanent fund is heavily diversified, he said, among stocks, bonds, foreign and domestic investments, along with real estate and nontraditional investments, minimizing the effect of the loss on the fund valued at $35 billion.

Despite the diversification, "it's not pleasant overall," he said.

That may not be it for the losses, either. The big brokerage firm Merrill Lynch & Co. agreed to be purchased at fire sale prices in an all-stock deal.

That will give the fund shares in Bank of America, but also will lock in losses in Merrill's stock.

As of June 30, the permanent fund had Merrill Lynch stock it had purchased for more than $24 million, some at nearly $80 a share. By Monday, it had fallen in value to around $10 a share, and Merrill leaped at the chance to be bought out at $29 a share after recently trading at $17 a share.

The permanent fund's biggest losses, however, may come from insurance giant AIG. As of June 30, the fund had stock it had paid $144 million for, though it had by that time fallen to $75 million in value as AIG's shares tumbled to around $25 each.

Monday, as AIG struggled to find a lender, those shares had fallen to about $5 each.

Burns said it appears there will be a substantial loss there, but it is not certain at this point.

"That may transpire that way, but that may be hard to speculate on that," he said.

Burns said he was encouraged that New York insurance regulators allowed AIG to borrow money from a state-regulated insurance subsidiary. The regulators' primary responsibility is to protect policy holders, he said, and they likely would not have allowed that if they thought AIG was at risk of failure.

Burns said despite risks in the current market, the turmoil Monday presents opportunities as well.

"We have money to invest," he said.

Some of the fund's money managers look for alternative investments such as "absolute return" strategies, in which managers can invest in a wide variety of investments.

That's a very small part of the diversified permanent fund, but this may be a good time for some of them, Burns said.

"Our absolute return strategies could do well in this market," he said.

• Contact reporter Pat Forgey at patrick.forgey@juneauempire.com.