Markets in turmoil on Lehman failure

By Dan Wilchins and Jennifer Ablan

NEW YORK (Reuters) - Global markets plummeted on Monday after investment bank Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over and the Federal Reserve threw a life line to the battered financial industry.

As a deepening crisis took new, bigger victims, The U.S. Federal Reserve said for the first time it would accept stocks in exchange for cash loans and 10 of the world's top banks agreed to establish a $70 billion (39 billion pound) emergency fund, with any one of them able to tap up to a third of that.

On a black Sunday for Wall Street, frantic attempts to find a rescuer for Lehman failed, and troubled insurer American International Group asked the Fed for a lifeline, according to news reports.

The events signal a seismic shift in Wall Street's power structure with big name investment banks biting the dust and major banks like Bank of America and JPMorgan Chase becoming the survivors.

"It's a return to pure capitalism, the survival of the fittest -- the government can't and won't bail everybody out," said Justin Urquhart Stewart, investment director at 7 Investment Management in London.

"Investors will now retreat to the trustworthy banks, though that's not a phrase that trips off the tongue easily nowadays."

Bank of America agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, seeking a bargain as the world's largest retail brokerage sought refuge from fears it could be the next victim.

"It's just shockingly fast how it happened," an employee for Merrill in Asia said. "It's hard to believe there will be no more Merrill Lynch," he said of his firm, known as The Thundering Herd.