Fortune’s Scott Moritz reports that Level 3 (LVLT), the debt-encumbered telecom wholesaler that saw its shares plunge 13% in trading Monday after its No. 2 executive resigned, could face more troubles ahead as credit markets continue to tighten.

Level 3 said Monday that its operating chief and co-founder, Kevin O’Hara, was resigning. The move raises concerns about the health of the company, which has struggled for a decade to finance its expensive broadband network operations. Level 3’s operating loss widened to $1.11 billion last year from $790 million in 2006. The losses are mounting at a time when the debt markets have gotten much tighter, as investors in financial stocks have learned the hard way in recent weeks. For its part, Level 3 refinanced $2.5 billion in debt last year and carries a total of $6.9 billion in debt. That's a heavy load considering the company has a mere $723 million in cash on its books.

Investors fear the company will soon cut its 2008 sales outlook and move its target for positive cash flow in its communications business out past the 2009 timeframe it has promised. That could add to pressure on the stock, which has lost more than two-thirds of its value over the past year.

Investors are piling onto the bet that the Countrywide (CFC)-Bank of America (BAC) deal will crack. Countrywide plunged 14% in trading Monday to a 13-year low on reports the FBI is probing whether the mortgage lender misrepresented its condition in financial filings. The selloff means that Countrywide shares are trading at a 32% discount to the value they would fetch should Bank of America complete its acquisition of Countrywide at the agreed-upon terms. The spread was just 9% two weeks ago, before the latest round of credit market stress sent financial stocks tumbling.

The selloff means more bad news for investors in Countrywide, which has lost almost 90% of its value over the past year amid a sharp downturn in the housing market. One Countrywide shareholder who may be particularly nonplussed is value investor Bill Miller, who recently pushed his stake in the company to almost 15% on the argument that the Bank of America deal undervalues Countrywide. With Countrywide shares fetching just $4.36 each - a discount of more than $2 a share to the indicated value of the merger - he’s going to have a hard time making that argument stick.

Needless to say, the news that crusading New York State governor Eliot Spitzer has acknowledged being involved with a high-priced prostitution ring was pretty much all anyone on a Wall Street trading desk -- or any trading desk anywhere, for that matter -- has talked about since the news of his role in the affair broke this afternoon on the New York Times website.

One of the senior trading executives at Bear Stearns, who ordinarily would have spent his entire day fending off (the essentially unfounded) rumors in the market about his firm's liquidity, told Fortune, "This is all we're talking about. I never imagined something like this could happen to [Spitzer.] Never, not once -- not even a suggestion that he did anything like this."

Nor were there any shortage of jokes, almost all of them unprintable and playing upon Spitzer's name and various intimate acts, floating around various trading floors.

It should also be noted that many traders were legitimately appalled, regardless of their political or personal views, that a man with three teenage daughters would do this.

Sent to Albany in a 2006 landslide based on his crusading work attempting to eliminate Wall Street research conflicts of interest, the New York Stock Exchange pay-flap, mutual fund timing and insurance bidding while New York's Attorney General, Spitzer quite literally made a career on his reputation for opposition to cronyism and self-dealing. At the same time, careful critics -- a vocal minority as it were -- were quietly astounded at his ability to go the limits of the law to obtain information or threaten massive global corporations with indictment for problems in select units.

While it is fair to say that Spitzer was quite a controversial figure on Wall Street, especially in the executive offices of firms he targeted in the insurance and financial services sectors, he was not as universally despised as commentators like to argue. Many securities industry veterans were disgusted at the dishonesty of the dot-com era broker research process. He actually had a quite a few critics among money managers who argue that the $1.4 billion global research settlement went no where near far enough in penalizing firms like Citigroup and Merrill Lynch for their role in peddling compromised research to unwitting clients.

Spitzer's connection to Wall Street has faded somewhat over the past year, for two reasons.

First, one of Spitzer's primary legacies as attorney general was pitched legal battles with former Big Board honcho Richard Grasso and AIG chief executive Maurice "Hank" Greenberg. Accustomed to using legal threats and motions to force out-of-court settlements -- or in the case of insurance giant Marsh & McLennan, forcing a CEO change -- Spitzer met his match in very rich men with nothing but time on their hands and who simply refused to yield on anything. The Greenberg case has largely collapsed and the Grasso matter remains out on appeal. Regardless, it is difficult to believe that current Attorney General Andrew Cuomo's staff is prosecuting them with anything like the fervor Spitzer's team brought to the matter.

Secondly, Spitzer's well-established reputation for ethical probity was damaged mightily a year into his office when key lieutenants became ensnared in an episode in which he allegedly was involved in using state police to investigate state senator Joseph Bruno. He has spent much of the past six months watching several of his aides, including press secretary Darren Dopp, fight bitter legal battles from various committees investigating the matter.

News surfaced earlier today that Spitzer had actually played quite an active role in the attempted rescue of the reeling monoline insurers, MBIA and Ambac, trying to get equity infusions done via direct investment or the extension of bank lines of credit. It is difficult to judge if he was successful.

The two mortgage guarantors are far from out of the woods, and despite ratings affirmations from the two main ratings agencies, there are virtually no investors or analysts, outside of Third Avenue Funds' chief Martin Whitman, who argue for their long-term prospects. Nor did Spitzer's cajoling of banks have much success: a group of about seven banks bought about $500 million in Ambac stock, but provided no credit guarantees nor direct investment.

Still, the efforts reunited Spitzer with his old lieutenant from the research investigation days, Eric Dinallo, and their combined efforts have at least put off for the foreseeable future the ratings downgrades that most of the capital markets assumed were coming.

But given the news of the day, expect more attention to be paid to Spitzer’s dealings of a more personal nature.

Health insurance stocks swooned in late trading after WellPoint (WLP) slashed its 2008 earnings guidance, citing slowing enrollment and rising medical costs. “We are making these revisions to our prior earnings guidance due to higher than expected medical costs, lower than expected fully insured enrollment and, to a lesser extent, the changing economic environment in which we are operating,” said CEO Angela F. Braly. The company now expects to make $5.76 to $6.01 a share - down from the previous guidance of $6.41. WellPoint fell $12.14 to $54.98, while UnitedHealth (UNH) dropped $4.71 to $40.50 and Wellcare (WCG) slid $3.98 to $39.90.

Lehman Brothers (LEH) is swinging the ax. Lehman shares fell after CNBC reported the big investment bank will cut 5% of its workforce, or about 1,400 jobs. The news comes as Lehman prepares to report first-quarter results next Tuesday. Wall Street has been bracing for a round of bad news next week from banks including Lehman, Goldman Sachs (GS) and Bear Stearns (BSC), amid a sharp slowdown in dealmaking and a fearful turn in the credit markets. At Lehman, analysts expect first-quarter earnings to fall by more than half, to 91 cents a share from $1.96 a year ago. A particular area of concern at Lehman is the bank’s big commercial real estate loan book, which is expected to see a big writedown as property values decline. With revenue under pressure, Lehman is responding by cutting costs, in a painful process that will no doubt be repeated many times over on Wall Street in the next few months.