Financial rout, Lehman bankruptcy spark massive slide

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Small-cap stocks staged a dramatic opening slide, as the market nervously tried to price in news this weekend that Lehman Brothers Holdings Inc. (NYSE:LEH) filed for bankruptcy. At 10:04 a.m. ET, the Russell 2000 (NYSE:IWM) was down 14.57, or 2.02%, at 705.69.

The entire financial system was seemingly under fire as the LEH news became the latest casualty of the ongoing credit crunch. What made this go-around different than previous debacles at Bear Stearns and Fannie Mae (NYSE:FNM) is that the government was unwilling to once again bail out the firm in question, which forced LEH to announce the bankruptcy filing this weekend.

Despite these new storm clouds on the financial horizon, there was still some talk about the market making a “capitulation” low today. Some traders also noted that while a LEH bankruptcy might have been a worst-case scenario, it certainly isn’t that much of a shock given what took place at the firm last week. Also, news that Bank of America (NYSE:BAC) was buying Merrill Lynch & Co. Inc. (NYSE:MER) didn’t seem like bearish news (although the initial reaction from BAC shareholders wasn’t exactly a warm embrace as the stock tumbled 16% shortly after the open).

Another firm that was in the crosshairs of bears last week and remained on the hotseat this morning is American International Group Inc. (NYSE:AIG), as stock in the world’s largest insurer tumbled some 40% early today, after hitting the skids last week as well.

Even though the Treasury Department and Federal Reserve decided not to earmark taxpayer funds to bail out Lehman, central banks around the world were adding liquidity into the system to help the markets ride out this morning’s selling storm. This latest calamity adds even more zest to the FOMC policy meeting Tuesday afternoon — with some market watchers now wondering if a rate cut has gone . . .

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