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Dow Plunges 500 Points

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DOW PLUNGES 500 POINTS

The Dow plunged on Monday and by the close Wall Street experienced its worst day in more than six years as fears about the U.S. financial system's stability escalated after Lehman Brothers filed for bankruptcy and insurer AIG struggled for survival.

I think initially the market digested the news better than expected, says Pete Najarian. But later in the day when AIG didn’t provide clarity on its situation the financials started to tip over.

Opening optimism was based on the idea that Lehman Brother’s being allowed to fail was part of Fed policy. But when the Street realized all was not resolved (in terms of government intervention) it became impossible to own any financial stock into the close, adds Jeff Macke.

The market recovered from Drexel and the market will recover from this, counsels Guy Adami.

Policy action never sets a market bottom, adds Joe Terranova. It’s the psychology of those who trade the market that sets a bottom and I think we’re entering the final stage of this crisis – that of capitulation.


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PILLARS OF WALL STREET CRUMBLE

The day followed one of Wall Street's most agonizing weekends ever, which saw the demise of Lehman Brothers and forced Merrill Lynch to accept a takeover by Bank of America Corp .

-- Lehman’s Demise


Lehman Brothers filed for bankruptcy after trying to finance too many risky assets with too little capital, becoming the largest and highest-profile casualty of the global credit crisis.

The Chapter 11 filing did not include Lehman's broker-dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them. Lehman is the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy amid a collapse in the junk bond market.

"As an industry Wall Street borrowed $3 trillion, a tremendous amount of money in order to expand its business," says CNBC’s Steve Liesman on Fast Money. "And they didn’t have the business to back it up!"

"I’ve heard people say, they’ve seen Lehman’s books and they didn’t mark down enough. I think this is just the beginning of a process. When you look at a financial firm you must look at them in terms of the excess credit that’s out there that must somehow go from weak hands to strong hands."

-- Merrill’s Demise

Bank of America added another slice to its growing financial services empire, buying Merrill Lynch in a $50 billion deal that would create a bank offering everything from fixed-income trading to credit card lending.

The purchase ends the 94-year independence of Merrill and pairs it with a banking behemoth that has announced more than $150 billion of acquisitions in the last five years.

Monday's merger deal came together in less than two days -- after Merrill Chief Executive John Thain called Kenneth Lewis, his counterpart at Bank of America, to propose a combination. The deal came as Thain, other top industry executives and officials from the U.S. Federal Reserve had huddled in emergency meetings in downtown Manhattan over the weekend to mull the fate of Lehman Brothers

For their trouble Bank of America plunged on the day, explains Jeff Macke. That’s what fear looks like.

As a result of what’s happened in the financials, panic in the marketplace has reached a new high, explains Pete Najarian. With the VIX over 31 it suggests to me that we could be near the bottom.

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HOW TO SAVE AIG?

Shares of American International Group plunged on Monday as investors grew increasingly nervous after the insurer failed to deliver a rescue plan.

Hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, AIG spent the day working feverishly to hatch a plan that would stave off rating downgrades, after Standard & Poor's threatened to cut the insurer's ratings on Friday.

Downgrades could also prove detrimental to AIG's insurance business, since policies often carry clauses that nullify a contract in the event of downgrades below a certain level.

According to reports late Sunday, the insurer turned to the Federal Reserve for $40 billion in bridge financing to ward off a liquidity crisis, but by Monday no details had emerged on a potential AIG rescue plan, which is also expected to include asset sales.


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GOLDMAN, MORGAN STANLEY EARNINGS ON TAP

Shares of both Goldman and Morgan Stanley fell on Monday ahead of their earnings reports. Investors can’t help but wonder what’s next for Wall Street’s two remaining independent investment banks.

Meanwhile, The Federal Reserve has asked Goldman Sachs along with JP Morgan to explore arranging $70 billion to $75 billion in loans to support AIG.

This is a game changer, says Guy Adami. If they get forced into a bailout it won’t be a good thing.

I think it’s a matter of semantics, counters Joe Terranova. Goldman is being asked to assemble the funding, he says. But I don’t think they’re being asked to fork over the money. I expect it to be a consortium of private equity.

Check out the downside puts in Goldman, says Pete Najarian. The volume of the 100 and 95 puts traded, suggests many investors expect the price of Goldman could go substantially lower.




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Trader disclosure: On Sept 15, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (WMT), (TTWO), (MSFT); Adami Owns (AGU), (BTU), (C), (GS), (MSFT), (INTC),( NUE); Najarian Owns (AAPL) And (AAPL) Collar; Najarian Owns (AMGN) Call Spread; Najarian Owns (MS) And (MS) Collar; Najarian Owns Owns (NOK) And Is Short (NOK) Call; Najarian Owns (RIMM) Call Spread; Najarian Owns (TSO) Call Spread; Najarian Owns (WB) Puts; Najarian Owns (XLF) And (XLF) Collar; Terranova Owns (NOV), (X), (POT), (FCX), (EOG), (AAPL), (GS), (KOL), (VLO), (SA); Terranova Owns (AIG) Puts And Owns (AIG)

Terranova Is Chief Alternatives Strategist Of Phoenix Investment Partners, Ltd.: Phoenix Investment Partners Owns More Than 1% Of (ABD), (ARE), (BIG), (BRE), (CNTY), (CNW), (CLB), (OFC), (DLM), (DRH), (DLR), (EPR), (ESS), (EXR), (AGM), (FL), (GBL), (GNET), (IGE), (LNET), (MAC), (OIIM), (PSPT), (DBC), (DBV), (SLB), (GWX), (SSYS), (SKT), (UA), (BIV), (VV), (BLV); Phoenix Investment Partners Owns More Than 1% Of Goldman Sachs Financial Square Fund - Money Market Fund; Phoenix Investment Partners Owns More Than 1% Of Seagate Technology Tax Refund Rights

Terranova Is Co-Portfolio Manager Of The Phoenix Diversifier PHOLIO; Phoenix Diversifier PHOLIO Owns (IGE), (DBC), (DBV)

GE Is The Parent Company Of CNBC