Pain Continues on Wall Street as Lehman Goes Bankrupt, and Merrill Sold to BofA

"I know Americans are concerned about the adjustments that are taking place in our financial markets," Bush said in the Rose Garden. "At the White House and throughout my administration we're focused on them, and we're working to reduce disruptions and minimize the impact of these financial market developments on the broader economy."

Wall Street Optimism?

The new government message -- that investors had to live with their own decisions and risks -- left some on Wall Street happy and even a bit optimistic despite the groundswell actions.

Throughout the weekend, Lehman was courted by Bank of America and British bank Barclays. But both backed down without the government's protection and after further reviewing their options.

That left Lehman with only one other option: enter bankruptcy before the market opened. This morning Lehman did just that, filing for Chapter 11 bankruptcy in the Southern District of New York. The company plans to continue operations as the court liquidates its assets.

To further try to shore up the financial system, 10 banks and securities firms independently have set up a $70 billion fund to provide necessary money to help struggling financial firms that threaten stock markets around the globe. Each bank will contribute $7 billion and loans to participating banks can be up to one-third of the total fund size.

A New Banking Superpower

Bank of America didn't just fade into the sidelines after walking away from saving Lehman. Instead, the giant bank set its sights on Merrill Lynch. In a rushed deal, scraped together in just one weekend, Bank of America ended up purchasing Merrill Lynch in an all-stock transaction worth about $50 billion.

The deal was a preventive measure, aiming at shoring up Merrill and stripping any doubt about the firm's heath or future.

Ken Lewis, CEO of Bank of America, said there was no pressure from regulators to make the deal. Lewis also said that Merrill would have been able to continue independently but that his bank decided to act before somebody else decided to make a bid for Merrill.

"As we weighted everything we said it is better to seize on this opportunity as we see it at the moment as opposed to trying to catch the very bottom and possibly not catching it at all," Lewis said during a conference call this morning.

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Bank of America has more deposits than any other U.S. bank, and Merrill is the world's largest brokerage. Together, they will form a massive banking empire, offering a wide range of products and challenging Citigroup's dominance as king of the U.S. banking sector.

The demise of Bear, Lehman and Merrill also leaves just J.P.Morgan Chase and Goldman Sachs as the two remaining independent Wall Street investment banks.

The Lurking Financial Storm

The nation's financial turmoil extends well beyond Wall Street, and all eyes are now on insurance giant AIG.

Like nearly every other corner of the economy, AIG is also suffering from the subprime housing meltdown. It sold numerous contracts insuring others against subprime losses. When those losses became a reality, AIG had to pay out more than expected.

The company reported losses of more than $13 billion for the first half of the year. Its stock has sunk nearly 80 percent since January.

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