Lehman Bros. joins string of market-shaking meltdowns

— -- Lehman Bros. Merrill Lynch. Fannie Mae. Freddie Mac. Countrywide Financial. Bear Stearns. In staggering succession, some of Wall Street's oldest and biggest firms have been seized, failed outright or merged into other companies.

"It's the worst news out of Wall Street since I've been alive," says Steve Romick, manager of FPA Crescent fund.

The credit crunch, which began in the real estate market, has emerged as a full-blown financial crisis threatening the global credit markets. Thanks partly to nimble emergency moves by the U.S. government, the financial system has avoided a full-scale collapse. There is widespread concern, however, that other financial institutions could be brought down by the sliding home mortgage market.

On Wall Street, though, the hurt runs deep and broad. Two Wall Street icons are about to vanish as independent companies. Lehman Bros., which began 158 years ago as Alabama cotton traders, filed for bankruptcy protection. And Merrill Lynch, whose bull mascot has been Wall Street's iconic symbol of optimism since 1970, agreed to be absorbed by Bank of America.

"It took my breath away," says Jim Dunigan of PNC Wealth Management. "I don't think anyone would have come up with that scenario."

The Dow Jones industrial average sank 504 points, or 4.4%, to 10,918 in the biggest point drop since Sept. 17, 2001, the day stock trading resumed after the Sept. 11 attacks. Monday's sell-off wiped out $700 billion in shareholder wealth.

As bloody as Monday's market trading was, the carnage was less than some had expected. "It wasn't pretty, but it wasn't a catastrophe," says Bill Gross, manager at the Pimco mutual funds.

Even so, the danger isn't over. Analysts say too many companies have borrowed too much to buy high-risk assets — mainly securities backed by subprime mortgages, which are loans made to borrowers with poor credit.

Now, companies that own those securities must write off their losses and raise fresh cash. That means fewer consumer loans and stricter loan standards, says Hugh Johnson of Johnson Illington Advisors.