Stocks Tank After Wall Street Shake-Up

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.Treasury Secretary Hank Paulson was huddled through the weekend at the New York Federal Reserve's fortress-like building in downtown Manhattan with executives from major banks and investment houses to hash out the fate of Lehman Brothers and to staunch the bleeding on Wall Street that threatened to shatter investor confidence around the globe.

"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.

The meetings that began Friday night were a who's who of financial heavyweights: Paulson, Timothy Geithner, president of the New York Fed, Securities and Exchange Commission Chairman Christopher Cox, and a host of CEOs, including Vikram Pandit of Citigroup Inc., Jamie Dimon of JPMorgan Chase & Co., John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs Group Inc., and Merrill Lynch & Co.'s John Thain.

The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.

The independent broker-dealers "are going the way of the dodo bird," said Bert Ely, an Alexandria, Virginia-based banking consultant.

That's partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said that investment companies will need the deep pockets of commercial banks to survive the next few years.

The cost of insuring financial firms' debt from default has been soaring.

A rise in the cost of the insurance, known as credit default swaps, indicates debt holders believe there is a greater chance of default by the financial companies. Especially over the past week, those insurance costs have been increasing rapidly as more debt holders fear companies like Lehman Brothers and Washington Mutual Inc. could collapse and not be able to repay their debt.

Swaps on most financial firms are likely to get even worse during the upcoming week, analysts said.

On Sunday, there was also an emergency trading session being held at the International Swaps and Derivatives Association to "reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy." The ISDA, which arranges trades for derivatives, said it was allowing customers to make trades and unwind positions linked to Lehman - but that those trades would be

Roubini said it's difficult to accurately gauge the health of companies like Merrill because their financial health depends on how they value complex securities. As a result, their finances aren't very transparent, he said.

That can lead to a loss of confidence in the financial markets, he said, which can overwhelm an investment bank even if it is financially healthy by some measures.

"Once you lose confidence, the fundamentals matter less," he said.

Ely said similar shake-outs have happened in other parts of the financial industry, such as credit cards and thrifts. Bank of America acquired independent credit card issuer MBNA in 2005, for example, while credit card company Capital One Financial Corp. has diversified itself by purchasing regional banks in Louisiana, Texas and New York.

The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. Roubini predicted they could drop another 15 percent.

The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now forecasting that the economy could slip into recession by the end of this year and early next year.

That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.

The Fed is widely expected to keep interest rates steady at 2 percent, below inflation, when it meets Tuesday. It was possible, however, that the central bank might decide in coming weeks to cut rates if such a move is seen as needed to calm turbulent financial markets.

The International Monetary Fund predicted earlier this year that total losses from the credit crisis could reach almost $1 trillion. So far, banks have only taken about $350 billion in losses.

Commercial banks are also starting to feel the pinch. Eleven have closed so far this year, including California-based IndyMac Bank, which had $32 billion in assets and $19 billion in deposits.