The Dow Jones Industrial Average and a whole slew of exchange traded funds (ETFs) are trading sharply lower this morning as a tsunami of trouble hit several large financial firms.

Lehman Brothers Holdings (LEH) filed for bankruptcy protection, Merrill Lynch (MER) was forced to sell to Bank of America (BAC) for $50 billion in stock, reports Tim Paradis for the Associated Press. Meanwhile, American International Group Inc. (AIG) is asking the Federal Reserve for emergency funding.

The developments squashed any hopes that the collapse of Bear Stearns in February was the worst of the 14-month long crisis.

The events this weekend happened after frantic round-the-clock negotiations, as bankers met to try and avoid a downward spiral in the markets, says Andrew Ross Sorkin for the New York Times. Ten major banks pulled together and agreed to create an emergency fund of $70 billion to $100 billion, which financial institutions can pull from in order to protect themselves from the fallout of Lehman’s failures.

Financial ETFs are taking a beating this morning:

• Financial Select Sector SPDR (XLF), down 26.7% year-to-date
• iShares Dow Jones U.S. Financial Services (IYG), down 25.8% year-to-date
• iShares Dow Jones U.S. Broker-Dealers (IAI), down 40.5% year-to-date
• KBW Insurance (KIE), down 20.2% year-to-date

Tags: Financial, IAI, IYG, KIE, Sector ETFs, XLF