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Another Wall Street icon, Morgan Stanley, was fighting for survival Wednesday night as panicked investors sent global markets into a sickening nosedive.

Not even the historic bailout Tuesday of American International Group Inc., the world's largest insurer, could calm investors amid fears that the U.S. government is running out of options to contain a widening financial crisis. The Dow Jones industrial average fell 449.36 points, leaving it 7.1 per cent lower in just three days, while the Standard & Poor's/TSX Composite Index slid 349.3 points to end the day officially in bear-market territory.

“We have gone from irrational exuberance not so long ago to excessive fear,” said Roger Lister, chief credit officer with rating agency DBRS Ltd. in New York. “Clearly the pressure is on the authorities globally.”

The speed of the crisis has overwhelmed policy-makers' attempts to find a solution, and thrown executives into a frenzy of deal-making as they try to save their firms. Just days after Lehman Brothers Holdings Inc. tipped into bankruptcy and Merrill Lynch & Co. hatched a last-minute merger to stave off potential failure, two more titans of Wall Street came under attack. Shares of Goldman Sachs Group Inc. and Morgan Stanley, the last of the big independent U.S. investment banks, fell so sharply that Morgan Stanley was reportedly considering a merger with another bank.

Washington Mutual, a huge but struggling mortgage firm, is also seeking a buyer. Across the Atlantic, British bank HBOS PLC was forced to sell to rival Lloyds TSB Group PLC after losing half its market value in a week.

So far, the Federal Reserve and the U.S. Treasury have little to show for a frantic rescue effort that began when they seized control of mortgage lenders Freddie Mac and Fannie Mae.

That bailout, combined with the takeover of AIG, has been so costly that the government is now scrambling to raise money with an unusual $40-billion auction of government debt. Rating agency Standard & Poor's warned that the spending spree is beginning to endanger the prized “AAA” credit rating that allows the U.S. government to borrow at low rates from the rest of the world.

Washington is focusing most of its rescue efforts on Wall Street, since the collapse of another major U.S. brokerage firm could quickly send shudders through the global economy.

“Unless we get this fixed pretty soon, we're in for a big, big, deep slowdown,” said former U.S. treasury secretary John Snow, who is now chairman of private equity firm Cerberus Capital Management LP.

Morgan Stanley is in talks with potential partners that include Wachovia Corp.

Morgan Stanley is facing a loss of investor confidence that has traders halting business with the firm and investors punishing its shares, which fell as much as 24 per cent Wednesday. Goldman fared better, but still finished the day down 19 per cent.

If Morgan and Goldman were to disappear, an almost unthinkable scenario even two weeks ago, it would mean the extinction of a breed of giants that dominated Wall Street for decades. The firms, like Lehman, Merrill and Bear Stearns Cos. before them, are being hammered because investors believe they have lost access to the crucial funding they need to survive.

“Goldman Sachs is the best-run investment bank in the world by a long shot,” said one senior Canadian banker. “But once the market place starts to get concerned, it's very difficult to do anything about it.”

The independent investment banks have relatively little in the way of capital and depend on a constant stream of short-term loans. In recent days, the market for those loans has almost shut down because banks are fearful of lending.

Now, executives like John Thain, CEO of Merrill and a former Goldman officer, say investment banks will need large bases of deposits to shore up their capital for times of trouble. Mr. Thain solved the problem by agreeing to sell his firm to Bank of America.

“They're fish in the barrel, the short-sellers have them targeted,” said William Smith, whose firm Smith Asset Management Inc. in New York manages $80-million, including Goldman stock. “Morgan Stanley's probably going to wind up doing a deal, it's really a matter of survival.”

For the Fed and Treasury, the options are dwindling. Central-bank rate cuts will have little effect, analysts said, because banks are unwilling to lend at any price. Flooding the system with additional cash worked at times in the past year to ease the symptoms, but hasn't cured the fundamental problem.

In Canada, the situation is calmer, though the Bank of Canada is keeping close tabs on the situation and plans meetings with bank CEOs. Banks are less nervous about their competitors' health because exposure to the U.S. subprime debacle is relatively minor and because the country's lenders all have access to borrowing facilities made available by the central banks. As a result, banks in Canada are able to borrow at less than half the premium that U.S. banks are being forced to pay.

While Canadian banks are still lending to one another, they are rebuffing calls from banks in the United States and Europe that are looking for money, said another senior bank official.

“They're calling and offering huge rates, but we're saying thanks but no thanks,” the executive said.

With a report from Bloomberg News