Hurricane Fuld, a.k.a Hurricane Dick, strengthened to category 5 and made landfall in New York City Saturday. Barclay’s is leading a European relief effort, but hopes of avoiding widespread damage are fading.
1) Bernanke and Paulson are up to their eyeballs in bad mortgage paper and don’t want any more. After the Bear Stearns and Fan-Fred deals, they are saying: “no mas.”
2) So, a Long Term Capital type of rescue is being attempted, but banks are balking at buying a slice each of Lehman’s toxic waste. The would-be rescuing banks are weak themselves, and adding to their toxic waste stockpiles would weaken them further.
3) There are banks that want to buy the good parts of Lehman, but the bids don’t seem to be high enough to keep the rest of Lehman from going down.
4) So, in addition to the rescue attempt, Lehman is preparing a bankruptcy filing, and CDS traders have been called into their offices to try and unwind their business with Lehman.
5) As the simultaneous plans of rescue, bankruptcy, and liquidation are advancing, everybody seems to be waiting for the Feds to blink and buy Lehman’s toxic waste.
Will Bernanke/Paulson blink? We will see, however the Fed has been discussing the topic of “liquidating a large i-bank” for several weeks now. And by “i-bank” we know that they meant “Lehman”. Maybe it has all been a bluff to force Wall Street to do the bailout itself. But as we are seeing, if Bernanke/Paulson don’t draw the bailout line somewhere, there will be no end to it.
I think that the Fed is prepared to liquidate Lehman.