In one of its wildest and weirdest stretches ever, Wall Street entered a weekend awaiting a government bailout of Lehman Brothers Holdings Inc. (LEH) and exited with Merrill Lynch & Co. Inc. (MER) agreeing to sell itself to Bank of America Corp. (BAC) for nearly $50 billion – and Lehman announcing it will seek bankruptcy in a bid to avoid a total liquidation after it was unable to find a buyer.

And this real-life version of the game show “Let’s Make a Deal,” is far from over: Like a once-great prizefighter who’s clawing for the ropes after being staggered by a shot to the chin, U.S. insurance giant American International Group (AIG) is trying to keep from dropping to the canvas. AIG leaders begged the U.S. Federal Reserve for a $40 billion lifeline – without which the insurance giant probably won’t last the week, The New York Times reported.

There’s even conjecture that the beleaguered Washington Mutual Inc. (WM) – the nation’s largest savings and loan – may get pulled down by this financial undertow.

“The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this,” Peter Kenny, managing director at Knight Capital Group Inc. (NITE), the New Jersey-based brokerage firm that handles $4 trillion in stock transactions a year, told Bloomberg News. “It’s an ugly and painful process.”

With Wall Street’s leaders huddled in meetings at the encouragement of the Bush Administration, yesterday’s fourth-down wheeling and dealing capped a weekend of furious, round-the-clock negotiations that demonstrate one very critical point – the credit crisis isn’t over.

In fact, it may actually be getting worse.

Many experts now worry that the U.S. financial sector faces a “crisis of confidence,” a potentially devastating psychological impasse from which there’s no easy escape. The stunning-and-sweeping moves, which are permanently reshaping the U.S. financial sector, are the latest chapter in a financial crisis that has resulted in hundreds of billions of dollars in losses – ostensibly due to bad real-estate loans, The Times reported.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm The Blackstone Group LP (BX), who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration – and whose new foundation is sponsoring the documentary, IOUSA, which warns of the looming U.S. government debt crisis.

In a move that mirrored the step taken by hedge fund Long-Term Capital Management 10 years ago this week, 10 major banks will create an emergency fund of $70 billion to $100 billion that financial institutions can use to protect themselves from the fallout of Lehman’s collapse. And the Fed expanded the emergency loan program it created for Wall Street banks, a move that The Times and other media outlets concluded will increase what each U.S. taxpayer will owe as a result of this crisis.

But it remains to be seen whether the sale of Merrill Lynch, the “controlled demise” of Lehman and the intervention into the fate of other key U.S. financial giants will be enough to keep the broader U.S. economy from getting swept into a stagflationary recession.

Original article by William Patalon III - Money Morning - With Buyout of Merrill, Bankruptcy of Lehman, Wall Street Plays “Let’s Make a Deal”

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