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Stocks Plunge as Wall Street Writhes

Stocks fell sharply at the opening bell 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.

The Dow Jones Industrial Average cascaded from a 90-point drop at the open, when only half of the stocks were open, to a nearly 300-point decline when it fully opened. JPMorgan was the only one of the Dow 30 stocks trading higher. (Track the Dow 30 components.)

The S&P 500 fell 2.5 percent and the Nasdaq lost about 2 percent.

“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.

Lehman Brothers shares, which are no longer traded on the NYSE but are trading, filed for bankruptcy protection late Sunday after it was unable to secure a buyer. Potential buyers, which included Barclays and Bank of America , dropped out of the bidding after the Fed wouldn't agree to backstop the deal as it did JPMorgan's fire-sale purchase of Bear Stearns.

The Lehman filing doesn't 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.

The Lehman collapse won't bring any more investment-bank bankruptcies, Dennis Gartman, founder of the Gartman Letter, told CNBC, adding that he thinks Goldman Sachs and Morgan Stanley will survive. Goldman is apparently going to be the clearing firm for Lehman specialists.

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, shocked the Street with an announcement that it has agreed to buy Merrill Lynch, the world's largest retail brokerage,in an all-stock deal worth about $50 billion.

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.

Bank of America probably could've gotten a better deal, Bank of America CEO Kenneth Lewis said in a joint press conference with Merrill Lynch CEO John Thain, but it was to seize the opportunity than to wait and maybe miss out on the strategic opportunity of a lifetime. He added that there was no pressure from regulators to close a deal this weekend.

Shares of Merrill Lynch jumped 24 percent, while Bank of America plunged 15 percent.

American International Group was the biggest decliner on the Dow, plunging more than 40 percent, after the world's largest insurer made the unprecedented move of asking the Fed for short-term financingto shore up its own capital situation.

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

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 couple of pounds 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, and the U.S. Fed reported industrial production fell 1.1 percent in August, the biggest decline since September 2005, due to a sharp drop in auto production.

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

Dow components ExxonMobil and Chevron tumbled.

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:

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

Send comments to cindy.perman@nbcuni.com.

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