Lehman

Interesting weekend.

With Lehman collapsing, a lot of top dogs in Wall Street are trying to see if there is still some meat left, or if it’s just bones. The Government and the FED are trying to see if the bank can be saved without taxpayer money. Might be a bit late after having put them on the hook for a few hundred billion dollars. The Governmen and the FED are right in trying to save the bank, as Lehman is pretty big on credit derivatives. Unfortunately, recent baylouts have convinced the street that Gov and FED will take the bill, so they push the envelop as much as they can. The major banks have allegedly called in credit derivative traders over the weekend to work out contracts offsetting, just in case. It’s a complex situation:

• Lehman won’t survive the weekend
• Gov and FED want the street to save it
• The street’s pushing the edges, cause it knows FED won’t let Lehman bust
• If Lehman goes bust, God knows what’s gonna happen
• If the FED saves Lehman, then the other majors will think the FED will be there for them too, with obvious consequences on de-leveraging etc etc

How will it go? The Street is right in believing the FED will be the savior of last resource. This is what recent bailouts have led the street to believe. The FED should let Lehman go bust to reestablish a bit of free market practice, but it probably cannot because nobody knows what consequences it will trigger.

But why another bank would buy Lehman? I don’t think we are at the ninth inning here, so whoever buys Lehman will be much weaker in the coming though quarters. It might be buying a lot of troubles, and a grave with them.

Maybe the FED will save Lehman. This will increase the odds that something similar will happen again soon (there is quite a list of troubled banks).

Or maybe another bank will save Lehman. This will increase the odds that something similar will happen to the very same buyer in the future.

Or maybe Lehman won’t be saved at all. This will increase the odds that some player will become distressed in the next few weeks.