Stocks Set to Plunge on Wall Street Pain

Stocks looked set to plummet Monday after a trifecta of Wall Street pain: Lehman Brothers filed for bankruptcy, Merrill Lynch was bought by Bank of America and AIG asked the Fed for short-term financing.

“This is another fine mess they’ve gotten us into,” Art Cashin, director of floor operations for UBS, told CNBC. Risk management “was thrown out the window when profitability came through the door.”

Market pros will be watching to see whether today's sell-off is capitulation or a retest of the July 15 lows, with key levels being 1200 in the S&P and 11000 in the Dow.

“The key .. is watch the bounce," Cashin said. "See what kind of shelf life it has. What kind of volume it develops. See where it rolls over. If they make a lower low, we’re in deep trouble. If they hold and re-rally, it may be okay.”

"This rally if it turns and looks real, should look like a cattle stampede in an old Western movie," Cashin said. "They should be chasing price and volume quickly."

An extremely rare Sunday afternoon Wall Street trading session, held with the intention of reducing systemic risk posed by Lehman , descended into chaos, said one participant.

Organized by ISDA, the International Swaps and Derivatives Association, the session was done via a massive conference call involving dozens of firms from all over the world.

"Yelling and screaming," occurred in the session, said one participant, with many participants unaware of the rules.

Stock futures were indicating a drop of about 3 percent for each of the major indexes though they were off their lowest levels. The calamity from the financial institutions all but completely drowned out a drop of more than $6 a barrel in crude oil, news that otherwise would have rocked Wall Street and probably sparked a huge rally.

Lehman Brothers filed for bankruptcy protetion but its filing does not include its broker-dealer operations and other units, including Neuberger Berman. The investment bank is looking at selling its broker-dealer operations, and is still in advanced discussions with a number of potential buyers of its investment management division.

Bankruptcy represents the end of a 158-year-old company that survived world wars and the collapse of Long Term Capital Management, but could not survive the global credit crunch.

Additionally, 10 Wall Street banks have agreed to set up a collateralized borrowing facility, and committed to fund $7 billion each.

The banks are Bank of America , Barclays, Citibank , Credit Suisse, Deutsche Bank, Goldman Sachs , JP Morgan , Merrill Lynch , Morgan Stanley , and UBS .

Bank of America, which was part of talks at weekend to buy Lehman, said it agreed to buy Merrill Lynch in an all-stock deal worth about $50 billion, snagging the world's largest retail brokerage after one of the worst-ever weekends on Wall Street.

The price, which comes to about $29 per share, represents a 70 percent premium to Merrill's share price on Friday, although Merrill's shares were trading at $50 in May and above $90 at the beginning of January 2007.

Lehman shares, which already had been pounded this year, were almost wiped out Monday morning, falling 88 percent to 45 cents in premarket trading. Merrill surged 27 percent, but Goldman fell 8 percent, Bank of America dropped 14 percent and Citi shed 12 percent.

Meanwhile, insurer American International Group , working to stave off rating downgrades and shore up the capital of its holding company, has made an unprecedented approach to the Federal Reserve seeking short-term financing, according to media reports.

(WEB EXCLUSIVE: Wilbur Ross says a thousand banks could close before the financial crisis is over. Click on the video at left.)

AIG shares tumbled 44 percent to $6.86 premarket.

The Federal Reserve launched a series of special measures, including accepting shares as collateral for cash loans at one of its special credit facilities, the first time that the Fed has done so in its nearly 95-year history, to calm down the markets.

Adding an extra pound onto the hundreds weighing down the market this morning, The New York Fed reported that manufacturing activity in New York State unexpectedly contracted in September. The Empire State business-conditions index fell to minus-7.41 from 2.77 in August. Economists had expected a reading of 1.5.

Elsewhere, crude oil dropped $5 to just above $96 a barrel , which was felt by a number of companies.

Dow components ExxonMobil dropped nearly 4 percent and Chevron lost 2.5 percent.

European markets were trading sharply down, falling around 5 percent because of the Wall Street turmoil. Asian markets -- the few of them that are opened today -- also fell sharply. Trading activity was limited by market holidays across the region, including in Japan, Hong Kong, China and South Korea, which will reopen Tuesday.

ON TAP:

Monday: Industrial production
Tuesday: CPI; Fed meeting; Earnings from Goldman Sachs, Best Buy, Adobe Systems
Wednesday: Weekly mortgage applications; current account; housing starts; oil inventories; Earnings from Morgan Stanley and General Mills
Thursday: Weekly jobless claims; leading indicators; Philly Fed; natural-gas inventories; Earnings from FedEx, Oracle and Palm
Friday: Quadruple witching

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