You are very very lucky that the car did not completely burn itself up... it has happened, and more than once. 740's used to have a TSB about battery cable replacements due to poor routing and crumbling insulation. This happened to a friend of mine, while on vacation a couple of years ago (see the pic).

The harness is all going to be trashed. It's very important that you remove the battery cables NOW if they were not disconnected. While it is possible to replace the wires that were at fault, they're likely to be damaged quite far back in the harness - the insulation surely is all crispy from melting.
The main wires involved will be the big red alternator wire from the hot terminal, the small red wire to the alternator field from the warning light, and the oil sender wire (small blue or green). However, it's likely that the wires to the ignition computer in the RF fender are burnt too. If that harness is destroyed, you'll be out of luck until you replace the whole wiring harness. If you can't find a good used one from a wreck, the dealer still sells them new, for about $400. Another couple hundred in labor, and the car will be back in business. Hopefully nothing else got burned up down there. Could damage the timing cover, timing belt, front crank seal, oil pan gasket, a/c compressor, drive belts, and the harmonic balancer too- it needs to have the splash shield removed, and the lower engine compartment inspected.
Wish you luck with it, that's a tough thing to have happen.
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Rob Bareiss, New London CT ::: '87 244DL/M47- 221K, 88 744GLE- 202K, 91 244 181K, 88 244GL 145K