Dow Falls 504 Points

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The Lowdown

The changes were so broad, abrupt and far-reaching that they triggered a selloff that sent stocks plummeting. The Dow Jones Industrial Average fell more than 500 points and closed at its lowest point in more than two years.

The trouble began when two of Wall Street's most respected financial institutions -- with a combined 252 years of experience -- collapsed over the weekend under the weight of investments gone wrong. Lehman Brothers (LEH), a firm whose reputation for disciplined investing had been thought to insulate it from recklessness, said it planned to file for Chapter 11 bankruptcy on Sunday.

Separately, Merrill Lynch (MER) said it will be sold to Bank of America (BAC) for $50 billion, or $29 a share. The acquisition would give Bank of America the largest brokerage in the world with 20,000 advisers on staff managing $2.5 trillion in client assets.

The demise of the two banks left Wall Street panicked and may leave as many as 50,000 people unemployed, Reuters reported.

With the scorched earth still smoldering, stocks turned sharply lower on Monday. Each of the major indexes lost more than 3.5%. The Dow Jones Industrial Average lost 504 points, or 4.4% of its value, to finish the day at 10918, the lowest close for the blue-chip index since July 2006. The Nasdaq fell 81 to 2180, and the S&P 500 dropped 58 to 1194.

Every sector fell into the red. Financials, energy, materials, capital goods and telecoms posted the heaviest losses. Techs, utilities, health care and consumer-oriented stocks also declined.

Traders expressed concern that other financial firms may yet fall or post heavy losses. AIG (AIG) had been near the top of that list until Morgan Stanley (MS) brokered a deal with the Federal Reserve to offer the firm a bridge loan of up to $40 billion. The firm also got a lifeline earlier Monday afternoon when New York Governor David Paterson said the insurer could use up to $20 billion in assets from its subsidiaries to remain solvent, Bloomberg reported.

AIG had been trying to raise capital to dodge a downgrade to its credit rating. A downgrade would hinder the insurer's ability to borrow and would likely leave the firm in ruin.

The Fed also took swift action on Sunday to help the entire industry. The central bank lowered its standards for collateral on the loans it offers to financial institutions. The change "should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally," the Fed said.

Meanwhile, several of the world's largest financial firms banded together to help manage the fallout. JPMorgan Chase (JPM), Citigroup (C), Bank of America, Goldman Sachs (GS) and Morgan Stanley were among the ten banks that committed $7 billion each to establish a $70 billion fund to keep firms solvent as credit remains tight.

The Democratic and Republican presidential candidates said the banks' downfall illustrated the need for improved regulation. Democratic presidential candidate Barack Obama said the turmoil was "more evidence that too many folks in Washington and on Wall Street weren't minding the store." Republican candidate John McCain echoed his belief that "fundamentals of our economy are strong" but pledged to "clean up Wall Street" and "reform government," The New York Times reported.

In energy, crude oil prices fell sharply as the Wall Street failures exacerbated concern over demand. Shortly before 4 p.m., crude had fallen $6.68 on the day to $94.50 a barrel.

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