JPMorgan Chase & Co is set to buy stricken rival Bear Stearns for a rock-bottom price, while the US Federal Reserve expanded lending to securities firms for the first time since the Great Depression to prop up the financial system.
The shock news, the biggest sign yet of how devastating the credit crisis is for Wall Street, slammed the US dollar to a record low against the euro, pummeled Asia stock markets and boosted gold and low-risk bonds.
The Fed also made an emergency quarter-point cut in its discount rate and agreed to finance up to $30 billion of Bear's assets as US Treasury Secretary Henry Paulson pledged the US government is prepared to do "what it takes" to maintain the stability of the financial system.
"The fear is how many more skeletons in the closet are still there in the global credit markets?" said David Cohen, economist at Action Economics in Singapore.
"This is another effort by the Fed to calm things down, but the cloud on the horizon is just how much more of these credit issues are still out there."
Faced with an economy that may already be mired in recession, the Fed is expected to pull another tool out of its box tomorrow by slashing its key benchmark overnight interest.
It has already cut the rate by a total of 2¼ percentage points to 3 per cent since mid-September - putting downward pressure on the US dollar.
The Fed's latest moves were seen as an attempt to prevent others from suffering the same fate as Bear, the fifth-largest US investment bank. Bear in essence faced Wall Street's version of a run on the bank as customers stopped trading with the firm and demanded their cash late last week.
On Friday, shares of rival Lehman Brothers were battered on fears it might lose investor confidence next, though a half-dozen hedge funds Reuters spoke to were trading with Lehman and Lehman insisted it was in good shape.
Bear's predicament shows how fast things can change on Wall Street.
JPMorgan is paying just $2 a share for Bear, or a total of $236 million, although the bank put a total $6 billion price tag on the deal including litigation and severance costs.
Still, the per-share payout is just one-fifteenth of Bear's stock price on Friday and miles off its record share price of $172.61 last year.
That means Bear's shareholders, including British billionaire Joseph Lewis and Bear Stearns' Chairman Jimmy Cayne, will have their holdings wiped out by the deal.