As Wall Street implodes, Bank of America Corp. (NYSE:BAC) has become the “new big kid on the block,” says Jennifer Yousfi. BofA has bought struggling Countrywide Financial and now Merrill Lynch (NYSE:MER) to become a US leader in financial services.

More in today’s Money Morning:

The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). Both firms will report a profit decline for the third quarter – but unlike Merrill Lynch and Lehman, Goldman and Morgan Stanley have remained profitable throughout the year.

“I think highly of Morgan Stanley and Goldman Sachs, so I expect them to ride this out,” Roger Altman – the CEO of investment banker Evercore Partners Inc. (NYSE:EVR) and a former deputy treasury secretary – said during an interview on CNBC. “But as to whether we’ve seen the last of this crisis, I think the answer to that is clearly: ‘No.’ And exactly where it goes from here and how it unfolds, I’m unsure.”

But how did it get this far?

The financial-sector convulsions that started in the summer of 2007 already have eliminated The Bear Stearns Cos., which in March was forced into a government-supported, cut-price sale to JPMorgan Chase & Co. A week ago, the U.S. Treasury Department took control of mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) – placing them into a conservatorship – after concerns that foreign central banks would stop buying our bonds actually forced the government’s hand.

Fed and U.S. Treasury officials met in an emergency session as Barclays PLC (ADR: BCS), the U.K.’s third-largest bank, and Bank of America Corp. (NYSE:BAC) abandoned talks to acquire Lehman after failing to win government guarantees against losses. The companies were considered leading candidates to acquire the 158-year-old investment bank after record losses erased 94% of its stock value this year.

Because the central bank and the Treasury had already intervened with the “shotgun” marriage of Bear Stearns and JPMorgan – underwriting $29 billion in assets as part of the deal – and with the conservatorship for Fannie and Freddie, most observers expected the financial sector’s dynamic duo to work their magic yet again.

But it was not to be.

That’s where the takeover talks took an odd turn. Although Merrill and Lehman are both investment banks – Merrill focuses on the brokerage business while Lehman keys on the institutional portion of the market – both firms made an ill-fated foray into real-estate-related investments.

Understanding that global investors would lump Merrill in with the other troubled companies as the crisis worsened, new CEO John A. Thain began buyout talks with Bank of America CEO Kenneth D. Lewis, published reports state.

One person briefed on the negotiations said Thain had rebuffed Bank of America when it approached Merrill earlier this summer. But understanding how a Lehman bankruptcy would whipsaw the markets, Thain realized a deal was the best answer this time around, The Times reported.

Bank of America will swap 0.8595 shares of its stock for each Merrill share. That works out to $29 a share, based on Bank of America’s closing price of $33.74 on Friday.

“A merger between Merrill and Bank of America is a good idea,” Richard Bove, an analyst at Ladenberg Thalmann & Co. in Lutz, Fla., told Bloomberg. “If Lehman fails, the next bank to be attacked would be Merrill. They are attempting to forestall that attack by linking with Bank of America.”

Bank of America – often referred to as BofA – may end up as the new big kid on the block in the U.S. financial-services sector. Earlier this year, Bank of America agreed to buy troubled mortgage lender Countrywide Financial Corp. – in a $4 billion all-stock deal that would make BofA the largest mortgage lender and loan provider in the U.S. market.

Some top experts like BofA’s bargain-hunting strategy.

“My bet is that Ken Lewis has made a very wise investment,” Saturnino S. Fanlo, CEO of KKR Financial Holdings LLC (NYSE:KFN), told a reporter. “I believe over time it will prove to be a great decision.”

Debt-rating firm Standard & Poor’s Inc. cut its long-term counterparty credit rating on Bank of America Corp. to AA- from AA and the credit ratings on the holding company were put on CreditWatch with “negative implications,” Bloomberg said late yesterday. Moody Corp.’s (NYSE:MCO) Moody’s Investors Service unit also is reviewing BofA’s debt for purposes of cutting the rating.

But that doesn’t faze Lewis, the BofA CEO.

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Lewis, 61, said in the statement.

Source: Buyout of Merrill and Bankruptcy of Lehman Heightens Worry of U.S. Credit Crisis Pain Still to Come