If there is rock & roll playing in lower Manhattan this morning, it is probably The Doors' "Peace Frog", as investors awoke to a market seeing financial giants Lehman Brothers, Merrill Lynch, and American International Group all discussed in badly negative news. 

Lehman, a troubled investment firm with major investments in the mortgage market filed for Chapter 11 Bankruptcy this morning.  Its stock has declined from over $65 at the beginning of 2008 to less than a quarter this morning.  The company had sought government intervention or an outside buyer over the past 10 days, but when none was forthcoming, found itself without options. 

Merrill Lynch, once one of the "Big 5" investment houses, had also suffered huge losses this year, although its involvement in the mortgage market was not as direct as Lehman's.  After its stock had tumbled nearly 70% year-to-date, Bank of America agreed to purchase the troubled firm for a similar 70% premium over its $17.05 closing price Friday. 

American International Group, or AIG, also faced serious questions this morning, seeing its stock tumble more than 50% as it became apparent that the company would need additional funding to continue operations. 

All three of these events have had a profound effect on credit markets.  Because of perceived risk in financial stocks, there has been a huge Flight-to-Quality this morning, as investors have abandoned riskier stock-market investments, instead piling into secure investments, especially government bonds. 

A Flight-to-Quality is an event in which investors abandon riskier investments in favor of more secure investments.  US Treasury debt, backed by the full faith and credit of the United States Government, is very secure, and is typically the most actively traded and widely sought investment in the instance of a Flight-to-Quality.  As a result, today saw treasury bond prices increase sharply, lowering the 10-year yield from Friday's close at 3.72% to 3.52% in mid-day trading.  A Flight-to-Quality is often erroneously referred to as a Flight to Safety.

Mortgage rates were not as significantly affected, due to the added risk of investment in mortgages.  Additional speculation suggested that the Federal Reserve Open Market Committee, scheduled to meet tomorrow, might consider cutting interest rates further to stabilize markets.  We'll find out about that tomorrow afternoon.  For additional information regarding the relationship between mortgage and treasury rates, see this article, or check back Friday for an update.