The upheaval in the American financial system sent shock waves through out the nation Monday, producing the worst day on Wall Street in seven years as investors digested the failure of one of its most venerable banks and wondered which domino would be next to fall.

It seems that Selma will not be affected by today’s transactions.

The major changes in investment banking interested Andy Stewart of Wachovia more on a personal level than a professional one.

“This was an historic day that changed the investment banking landscape,” he said. “The story however will not affect retail banks.”

Stewart explained retails banks, which deal mostly with everyday banking needs, should not be directly influenced by today’s changes.

The Dow Jones industrial average lost more than 500 points its steepest point drop since the day the stock market reopened after the Sept. 11, 2001, attacks. About $700 billion evaporated from retirement plans, government pension funds and other investment portfolios.

The carnage capped a tumultuous 24 hours that redrew U.S. finance. Lehman Brothers, an investment bank that predates the Civil War and weathered the Great Depression, filed the largest bankruptcy in American history. Merrill Lynch fled into the arms of Bank of America.

“We are in the middle of a deep, dark recession, and it won’t end soon. Here it is, and it is pretty nasty,” said Barry Ritholtz, who writes the popular financial blog The Big Picture and is CEO of research firm FusionIQ.

And the fallout was far from over. American Insurance Group, the world’s largest insurer, was fighting for its very survival: New York Gov. David Paterson moved to allow the company to tap one of its subsidiaries for an emergency loan to stay above water.

“AIG still remains financially sound,” Paterson said, even as the company’s stock tumbled almost 60 percent. Almost $20 billion was wiped off AIG’s balance sheet on Monday.

While Lehman Brothers was filing for Chapter 11 and AIG was scurrying to find financing to stay afloat, Merrill Lynch was avoiding a similar fate with a $50 billion transaction to become part of Bank of America Corp.

The deal would create a financial giant rivaling Citigroup Inc., the biggest U.S. bank in terms of assets. Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world’s largest and most widely recognized brokerage.

“It was an opportunity of a lifetime,” said Ken Lewis, Bank of America’s chairman and CEO.

Lewis made the announcement at a news conference where he was flanked by a smiling John Thain, Merrill’s chief executive. The two put the deal together in 48 hours, while they were taking part in marathon discussions at the New York Federal Reserve over the weekend to save Lehman Brothers. Merrill stock rose a penny Monday.

One huge concern is that the Lehman bankruptcy will probably trigger even tighter credit — making it more difficult for everyone from large companies to small businesses to American homebuyers to borrow money.

There were worries that Lehman’s problems would infect other financial companies and spread to global stock markets, further harming the U.S. and global economies.

The Fed meets Tuesday to decide interest rate policy. It’s widely expected to keep rates at 2 percent, but some economists believe it could lower them to soothe Wall Street’s frazzled nerves.

The financial turbulence could also further derail consumer confidence in the economy just as stores prepare for the critical holiday shopping season. The upheaval in the financial system also means that those consumers with marginal credit history will have an even harder time getting loans, cutting into consumer spending.