Jay Currie

Fearing that a failure of Lehman Bros. could topple other financial firms, senior officials of the Federal Reserve and Treasury Department were talking with the struggling company and potential buyers Thursday to try to smooth the way for a sale of the venerable investment bank, people familiar with the situation said.

The 158-year-old Wall Street institution has seen its shares fall 70% in the last three days. A sale of Lehman Bros. Holdings Inc.—at what would be a bargain price—would make it the second major Wall Street firm to succumb to the nearly 2-year-old mortgage crisis. LA Times

The weird part of the Lehman story is that the federal government may be involved.

Lehman is all about capitalism. It makes what amount to bets about particular paper. For 158 years they were right and the partners made a bundle. But in the last few years, like a lot of investment banks, they bought really dreadful paper and they were, well, wrong. The partners made less money and, now, they will lose on the paper. As they should.

So why are the feds involved?

Too big to fail?

The fact is that there are going to be a lot of failures. Marking to market is going to be nasty. Cushioning that nastiness is not to do anyone any favours. It merely means that idiotic, high yield, plays are going to get government protection.

This will not be good. And yes, I do know about the counterparty problem. To a large degree, so what? One can speak of the collapse of the American banking system; or one can hope for the correction of that system. They are different things but both will inflict pain. Hamptons houses are already going begging.

The correction of American banking needs to happen. The now thirty year olds who granted shitty mortgages to lousy credits and then sold the paper need to stop making 20 million a year. A serious contraction of the business needs to happen too. Blood in the streets is buy opportunity, as Nathan Rothschild pointed out.

Time to start bleeding Lehman dudes.