Stocks Tank After Wall Street Shake-Up

Dow Drops 500 Points As Investors React To Demise Of Lehman Brothers, Buyout Of Merrill Lynch

(CBS/AP)  The stock market has suffered one of its worst days in years as investors reacted to a stunning reshaping of the landscape of Wall Street that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

The Dow Jones industrials are down more than 504 points, their sixth-largest point drop ever and their worst showing since the aftermath of the Sept. 11, 2001, attacks.

Investors were shaken by Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock.

President Bush expressed confidence that the economy is strong enough to handle fluctuations in financial markets, adding though that in the short run these adjustments "can be painful."

A forced restructuring of the world's largest insurance company, American International Group Inc., also weighed heavily on global markets as the effects of the 14-month-old credit crisis intensified.

Investors will be watching to see whether the Dow moves below the 11,000 mark, a level it hasn't traded and closed under since mid-July. The S&P 500 last tested the 1,200 level in mid-July.

Stock markets tumbled around the world, with European benchmarks punished following sharp losses across Asia.

The FTSE-100 share index was down 4.07 percent in London, the Paris CAC-40 was off 4.5 percent and Germany's DAX 30 index of blue chips sagged 3.23 percent.

Asia's biggest stock exchanges in Japan, Hong Kong and South Korea were closed for holidays, but India's Sensex tumbled 3.4 percent, Taiwan's benchmark index plummeted 4.1 percent and Singapore dropped 3.2 percent.

A global consortium of banks, working with government officials in New York, announced late Sunday a $70 billion pool of funds to lend to troubled financial companies. The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.

Ten banks - Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS - each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."

The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."

The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will spur a much greater focus by presidential candidates - Republican John McCain and Democrat Barack Obama - and members of Congress on the need for stricter financial regulation.

In addition to a likely plummet in the stock market, CBS News correspondent Anthony Mason reported that people seeking loans will be most affected by Wall Street's latest round of bad news.

"The banks are scared and nobody wants to buy these companies," Mason reported.

Filing for bankruptcy was the first step by Lehman Brothers to seek an orderly unwinding of its businesses. All potential buyers walked away after the U.S. Treasury refused to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac.

Expectations that Lehman would survive dimmed after Barclays PLC withdrew its bid Sunday to buy the investment bank. Barclays and Bank of America were considered front-runners to buy Lehman, which was floundering under the weight of $60 billion in soured real estate holdings.

Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for $29 a share, according to a person briefed on the deal who spoke on condition of anonymity because the agreement had not yet been finalized. That's a premium to its closing price on Friday of $17.05, but only a fraction of its price of almost $100 a share early in 2007.

Charlotte, North Carolina-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination of the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.

Strategically, most industry analysts say it's a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies - Bank of America does have an investment bank already, but it has never been terribly strong.

Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.

The deal would not come without risks, however. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.

And Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.