Stocks fell sharply 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.
But investors didn't panic and, after the initial plunge off the cliff, they shook off the weekend beating and started scouring around for some bargains, notably in consumer stocks.
"In the back of a lot of people's minds this was somewhat expected, and I think this is going to be interpreted as cleaning up the house," said Kathy Boyle, president of Chapin Hill Advisors in New York. "This was the other shoe. We had to let it happen. Here it is, but now we're going to get on to business."
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, then pulled back to about 250.
JPMorgan was the only one of the Dow 30 stocks trading higher during the morning bloodbath, but was later joined by consumer stocks including Coca-Cola , McDonald's , Procter & Gambleand Johnson & Johnson .
Beaten-up airlines also advanced as crude oil dropped $5 to just above $96 a barrel . United parent UAL and American parent AMR were both up about 10 percent.
Of course, financials provided a solid albatross on the Dow, with AIG off more than 60 percent, and Bank of America and Citigroup off more than 10 percent.
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," Art Cashin, director of floor operations for UBS, told CNBC. "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, plunged to pocket change after the brokerage filed for bankruptcy protection late Sunday,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, which is part of Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, 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.