We all woke up this morning – or went to bed last night at midnight — to find that the Wall Street world as we know it has forever changed with Lehman Brothers filing for Chapter 11 Bankruptcy and Merrill Lynch being sold to Bank of America. Some media outlets are calling this a Wall Street meltdown of iconic brands. I’m not sure what to call it. It is an unbelievable turn of events and a sad end to the history and culture of these firms.

Teetering on the edge, Lehman Brothers, the global institutional investment bank, was forced into bankruptcy over the weekend after the failure of negotiations with regulators to guarantee the losses. Fearing that the demise of Lehman could spread to other troubled financial institutions, Merrill Lynch hammered out a deal to sell itself to Bank of America for $50 billion in stock, according to the New York Times.

I knew things were serious when 30 heads of Wall Street firms were called to a meeting Friday night at the Federal Bank of New York with Treasury Secretary Henry Paulson, SEC Chairman Christopher Coxand Timothy Geithner who heads the Federal Reserve Bank of New York. When they left in their black town cars, they avoided photographers by going through the garage, but someone took John Thain’s photo. He landed on the front page of the New York Times looking grim. But meeting turned into a weekend marathon of non-stop negotiations. Barclays Bank and Bank of America had emerged as the main contenders to bid for Lehman Brothers.

Everyone thought that the Fed – courtesy of the U.S. taxpayer – would bail out another investment bank. Earlier in the week, the Fed took over the mortgage giants Fannie Mae and Freddie Mac, and in March the Fed backstopped JP Morgan’s purchase of Bear Stearns with $29 billion in loss guarantees. But this time, Paulson evidently put his foot down and said no. Such bailouts are rewarding risk takers with no consequences and perpetuating the notion of a moral hazard. I read many articles over the weekend with economists and others saying the government had no appetite for another bailout and that Wall Street would have to find a solution on its own. Then I read that talks fell apart with Barclays because it would have had to guarantee Lehman’s trading commitments. Regulators did push the 10 major banks to form a fund totaling $70 billion to loan money to troubled firms.

Questions remain about whether these drastic actions will calm the financial markets, reeling since the credit crisis began about 14 months ago. So far the Dow Industrial Average slumped over 300 points in the first hour of trading this morning. (On Sunday night, futures tied to the DJIA fell 250 points in electronic trading.)

Lehman’s participation in the financial markets stretches across all asset classes — equities, fixed income where it’s a huge player as well as credit derivatives. I also wonder if regulators could have given Lehman more time to find a buyer. But they were afraid of the crisis causing ripples for Merrill Lynch. Now insurance giant American International Group (AIG) is looking for a $40 million bridge loan from the Federal Reserve Bank to avoid a liquidity crunch and continue operations. Apparently, Lehman's disclosure that it would post a $3.9 billion loss for the second quarter negatively impacted the value of AIG's subprime holdings. Will the bleeding end soon?

Here are a few links to articles covering the fall of two Wall Street icons and AIG's latest troubles:

http://money.cnn.com/2008/09/15/markets/markets_newyork2/index.htm

http://www.nytimes.com/2008/09/16/business/worldbusiness/16markets.html?_r=1&hp&oref=slogin

http://news.yahoo.com/s/ap/20080915/ap_on_bi_ge/financial_meltdown

http://www.cnn.com/2008/US/09/15/banks.bigchanges/index.html

http://online.wsj.com/article/SB122148503202636197.html?mod=googlenews_wsj