The seismic shift on the Wall Street landscape sent stocks tumbling Monday, with the Dow Jones industrials sliding 500 points in their worst point drop since the September 2001 terrorist attacks, the Associated Press reported.
Global stock markets also fell Monday as investors absorbed the demise of the Wall Street titans.
Later Monday it was also announced that American International Group Inc. will be allowed to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, New York Gov. David Paterson announced.
The move comes as AIG continues to discuss possible restructuring options amid concern the world's largest insurer could need up to $40 billion to shore up its balance sheet, according to media reports.
The faltering of Merrill Lynch and Lehman Brothers marks the latest fallout in the nation's staggering credit crisis, propelled by subprime mortgages and soured real estate investments.
News of the Wall Street shake-up emerged Sunday, as attempts to find a buyer for Lehman turned up short, the Merrill Lynch deal solidified and concerns emerged about other powerful financial firms, including troubled insurer American International Group.
Bank of America Corp. said early Monday it would acquire Merrill Lynch in an all-stock transaction worth about $50 billion that should lift the uncertainty that has plagued Merrill -- a brokerage firm familiar with consumers worldwide -- since the start of the credit crisis over a year ago. The deal for Merrill Lynch pays a 70 percent premium to the brokerage's closing price Friday.
"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," Bank of America Chairman and Chief Executive Officer Ken Lewis said in a statement, according to the Associated Press. "Together, our companies are more valuable because of the synergies in our businesses."
In an unusual bid to prevent panic on world markets, the U.S. Federal Reserve also said for the first time it would accept stocks in exchange for cash loans and 10 of the world's top banks agreed to establish a $70 billion emergency fund, with any one of them able to tap up to a third of that, according to Reuters.
Lehman's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank and the government refused to bailout the 158-year-old firm.
According to the Wall Street Journal, the frantic weekend on Wall Street began late Friday when government officials, including Treasury Secretary Henry Paulson and Federal Reserve chief Ben Bernanke, informed financial leaders that there would be no government bailout for Lehman.
The decision came a week after the government decided to take over mortgage giants Fannie Mae and Freddie Mac and months after it facilitated the sale of struggling Bear Stearns to J.P. Morgan Chase.Treasury Secretary Henry Paulson told reporters Monday that the American people can remain confident in the "soundness and resilience in the American financial system." Paulson said he "never once" considered it would be appropriate to put taxpayer money at risk to resolve the problems at Lehman Brothers.
In its bankruptcy petition, Lehman listed Citigroup among its biggest unsecured creditors, with about $138 billion in bonds as of July 2. The Bank of New York Mellon Corp. was listed as holding about $17 billion in debt, according to the AP.
"It's a return to pure capitalism, the survival of the fittest -- the government can't and won't bail everybody out," Justin Urquhart Stewart, investment director at 7 Investment Management, told Reuters.
Under the Merrill Lynch buyout deal, three directors of Merrill Lynch will join the Bank of America Board of Directors. The deal propels Bank of America, which bought troubled mortgage lender Countrywide Financial earlier this year, to the top of the U.S. financial sector and poises it to rival Citigroup Inc., the biggest U.S. bank in terms of assets.
The fate of Merrill's 60,000 employees and Lehman's 25,000 employees is still unknown. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.
"The resume flow will start on Monday like there's no tomorrow," Michael Karp, chief executive at executive search and consulting firm Options Group in New York, told Reuters.