The Dow Jones industrial fell 500 points at the close of the markets Monday, hours after Mayor Michael Bloomberg said that New York City is prepared to handle an unprecedented financial shake-up that could mean the loss of more than 10,000 Wall Street jobs.

Lehman Brothers, Wall Street's fourth-largest investment bank, filed for Chapter 11 bankruptcy protection Monday, while Merrill Lynch sold itself to Bank of America as insurance giant AIG faced its own financial problems.

Together the firms employee tens of thousands of New York residents, many of whom face an uncertain future.

At the close of the markets Monday, the Dow was down 504.48 points.

"It's the interconnectedness of banks that makes the downfall of one more significant," explained Howard Chernick, an economics professor at Hunter College.

Mayor Michael Bloomberg said Monday afternoon that New York City is prepared to handle this crisis, but it will not be an easy task.

At a news conference at City Hall, the mayor called Monday a "sad day," but said the city will be able to rebound.

"The vital signs of the city's economy are strong," said the mayor.

He also said it's time for the financial industry to focus on the greater good.

"Our financial system cannot continue to stand this game of speculators preying on the weak firms, and trying to destroy them for profit," said Bloomberg. "There will always be a weakest firm, by definition, there must be. But we have to understand that our country's future is connected to our ability to work together, instead of trying to tear each other down."

The mayor said revenue came in as planned in August, and that the city's forecasted budget deficit of $2.3 billion remains the same.

"We have planned for a day like today," said City Council Speaker Christine Quinn. "We projected job losses in the city's budget. We paid down future deficits."

City Comptroller Bill Thompson also weighed in, reminding New Yorkers that it is not only employees of the big companies that are affected by the collapse.

"There's a multiplier effect for every Wall Street job," he said. "There's a multiplier effect in other positions, and, of course, that works in the opposite, as well. Many small satellite businesses and their employees are also impacted, resulting in a ripple effect, throughout our communities and our city."

The mayor did not talk specifically about what he will do if Wall Street's problems cause the city's deficit grow. But one thing is clear – raising taxes is not off the table. That means the seven-percent property tax cut will likely not last forever.

"We can't balance the budget just by cutting more," said the mayor. "We can do more than we have, and we will. But then we'll have to look at other ways of raising revenue."

Lehman Brothers Files For Bankruptcy

The 158-year-old investment company Lehman Brothers filed for Chapter 11 protection in the U.S. Bankruptcy Court in the Southern District of New York Monday morning under the weight of $60 billion in real estate losses.

Lehman was forced to make the move after weekend negotiations broke off without any interested buyers.

Employees arrived at the company's Midtown headquarters Monday morning with boxes, suitcases, and even handcarts to clean out their offices and desks. It is not clear how many people will be out of work.

In a press release sent out Monday morning, Lehman stressed that it is trying to keep as much of the business operating as possible.

"It's just really sad," said one Lehman employee leaving the office this morning. "The whole thing is really quite sad. I really don't want to talk to anybody. The whole thing is just really upsetting."

"Hopefully jobs will be saved," said another, fighting back tears. "It's kind of sad."

"We were really kept in the dark, so it's really hard to tell what went wrong," said a third employee.

Governor David Paterson said Monday that the state is working to make sure that Lehman's 12,000 employees that live in the New York area get access to the benefits they are entitled to and will provide any training they need.

Some employees said they were furious that after all their loyalty to Lehman, the company's bankruptcy leaves them with little or nothing. Lehman employees owned one-third of the company stock and say they were continually told everything would be okay.

One longtime employee told NY1, "The CEO got greedy and threw 25,000 employees in front of the bus."

Aaron Elstein of Crains New York Business said that assessment may be accurate.

"I remember in April, at the annual meeting, the CEO Dick Fuld got up and said, 'I'm going to hurt the people who are criticizing us,'" said Elstein. "They talked tough until the very end and here's the result."

The Federal Reserve had refused to help the struggling company, saying Lehman knew it was in trouble for some time.

Lehman's stock price dropped to $3.65 a share Friday, a huge drop from their 52-week high of $67.73.

Bank of America Buys Merrill Lynch

Meanwhile, Bank of America has worked out an all-stock agreement to buy Merrill Lynch for about $40 billion.

It's not entirely clear that Merrill needed to be saved – but with billions upon billions in write downs this year, there's been increasing concern that Merrill would be hit by the same spiral of investor confidence that claimed Bear Stearns and Lehman.

Bank of America pulled away from negotiations to buy Lehman, and instead worked out an agreement to buy Merrill Lynch.

"I think the situation at Merrill is stabilized because Bank of America is taking the over," said Fordham University Finance Professor J.R. Lothian.

At a Monday news conference, officials from the two companies said the deal would have made sense in any environment.

"This opportunity is, I think, a very good opportunity both for our shareholders and for our employees," said Merrill Lynch Chairman and Chief Executive Officer John Thain. "The fact that the combination fits so well, it makes strategic sense, there isn't that much overlap in the vast majority of the businesses. I think this is going to be a very attractive transaction from a shareholder point of view, but also from an employee point of view."

"For seven years now as CEO I have said I thought the commercial banks would eventually own investment banks because of the funding issue and I still think that," said Bank of America's CEO Ken Lewis. "So I was a little ahead of my time seven years ago."

Mayor Michael Bloomberg said that the heads of Bank of America and Merrill Lynch assured him that job loss at those companies would be minimal.

Paterson Steps In To Help Ailing AIG

In an effort to prevent the collapse of another financial giant, Governor David Paterson announced Monday afternoon that the state will take action to help the world's largest insurance company.

Thanks to state efforts, AIG will now have the ability to access $20 billion in subsidiary assets so that it can have the cash to pay off its parent company and reassure investors.

"I have directed our superintendent of insurance to provide the authorization such that AIG can access $20 billion of its assets through its subsidiaries for the purpose of posting these assets for collateral to provide liquid cash to allow day-to-day operations of the company," said Paterson.

The move will require a change to regulatory policy.

Given the fact that AIG employs 6,000 people in New York City and its impact of the state's financial stability, Paterson said it was necessary for the state to intervene to assure its well being.

Paterson reiterated that this move is not a government bailout and that no taxpayer dollars are being used.

He also blamed the current crisis on a lack of transparency within the financial sector.

The governor's announcement jerked back AIG's plummeting stock price, although its close was about one-fifteenth of its year-long high.

"AIG, for a long time, was the largest insurer in the United States by market value," said Dan Wilchins of Reuters. "It has thousands of customers globally. It has a trillion dollars in assets. It's a massive, massive company, and to the extent that AIG tumbles, it will have a huge ripple effect across the entire economy."

There are other companies in trouble. Washington Mutual's shares have been sliding as investors lose confidence in its ability to stay afloat.

Federal Reserve Takes Action

As the news was breaking Monday morning, the Federal Reserve put together a series of emergency tools to head off panic. It is expanding its loan programs and accepting a broader range of collateral for its loans.

In a statement, Chairman Ben Bernanke said the moves, with commitments from the private sector as well, are designed "to mitigate the potential risks and disruptions to markets."

The focus now turns to what the Fed will do at its formal meeting on Tuesday. Fed watchers are now largely expecting a rate cut. Interest-rate futures have jumped, signaling the market expects the Fed to cut its benchmark rate to 1.75 percent from 2 percent.

Treasury Secretary Henry Paulson said Monday that Americans can remain confident in the financial system, which he described as sound and resilient.

"I don't look at any one day, any one indicator, any one week. As I've said, we're not going to move through this in a straight line," said Paulson. "There are going to be some real rough spots along the road, but I believe we're making progress, and when I look at the way the markets are performing today, I think it's a testament to the way the financial industry has come together."

Paulson says putting taxpayer money at risk to resolve the situation at the privately run Lehman Brothers was something he never considered.

The big global banks that are not in as much trouble are stepping in to try to stabilize their industry. Ten banks will each put $7 billion into a fund that can be lent to struggling financial companies. Among the banks participating: JP Morgan, Citibank and Goldman Sachs.

Speaking from the White House during an appearance with the president of Ghana, President George W. Bush said the United States economy is healthy enough to withstand "the adjustments that are taking place" in the financial markets.

He also said his administration is focusing on the problem to reduce disruptions and minimize the impact of the crisis on the broader economy.

Bush said he sympathizes with investors and employees of the fallen companies, but that federal policymakers will focus their attention on "the health of the financial system as a whole."

What This Means For Investors

Securities regulators and financial advisers are trying to reassure individual investors that their brokerage holdings are safe despite the collapse of Lehman and the sale of Merrill Lynch.

The SEC said the Securities Investor Protection Corporation, which is an insurance plan for brokerage accounts, would cover the customers up to a maximum of $500,000 per client, with a maximum of $100,000 for cash.

The trouble on Wall Street is a blow to the New York economy, which depends on big Wall Street paychecks to keep the sales flowing at everything from restaurants to apartments, clothing shops to car dealerships.

According to the Associated Press, Wall Street makes up one-fifth of the state's economy.

Mayor Michael Bloomberg cancelled a trip to California to remain in New York to help monitor the crisis on Wall Street.

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KEY TERMS

What Is An Investment Bank?

Although the traditional role of the investment bank is to link investors to companies that need capital, they’ve increasing gotten into the action of investing in companies themselves. In good times they generate billions in profit on their own trading and investments. But those investments also leave the banks themselves exposed to a downturn.

Until the bankruptcy of Lehman Brothers and the sale of Merrill Lynch, the four largest and most profitable firms on Wall Street were Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs.

Federal Reserve

The Federal Reserve System is the central banking system of the United States. The primary motivation for its creation was to help in the event of financial crisis. Other functions include serving as the central bank for the U.S., managing the nation's monetary supply, and maintain the stability of the financial system.

When a major financial institution is in danger of collapse, the company can seek support from the Federal Reserve. The Reserve stepped in to provide an emergency loan to investment bank Bear Stearns and mortgage companies Freddie Mac and Fanny Mae, but refused to aid ailing Lehman Brothers.

Lehman Brothers
Founded in 1850, Lehman Brothers is a global financial-services firm. The company is active in equity and fixed-income sales, trading, investment banking, investment management, and private equity, serving the financial needs of corporations, governments, municipalities, institutions, and high-net clients.

On September 15th, 2008, the company filed for bankruptcy – listing debts of $613 million.

As of 2008, Lehman had 26,200 employees.

Merrill Lynch

After seeing investor confidence in Lehman Brothers plunge, Merrill Lynch opted for a more certain future by selling itself to Bank of America. With 45 billion dollars in write downs because of bad investments, some investors feared Merrill was headed toward the same fate as Lehman and Bear Stearns. The $50 billion dollar Bank of America buyout pairs Merrill with a retail banking business that isn’t as exposed to the risky investments common on Wall Street.

AIG

The American International Group, popularly known as AIG, is an insurance company based in New York. Founded in 1967, AIG specializes in auto, health, life and homeowners insurance for industrial, personal and commercial needs. It is also one of the top retirement financial services providers in the United States.

Late Sunday night, AIG announced that it will sell off some of its assets, raise more capital, and go to the Federal Reserve for help to stave off a downgrade.