Wanna bet the Fed bails out Lehman’s creditors?

There is no way any rational buyer will take over Lehman without someone else taking the risks of holding their bad assets. With a market cap of just $2.6 billion, Lehman’s share price is not the issue. An honest valuation of Lehman’s assets would surely result in a massively negative equity figure.

The company is clearly insolvent, since it showed over $40 billion in Level III assets, $200 billion in Level II assets and $640 billion in total assets, levered on top of just $26 billion in equity. Merill’s recent sale of mortgage assets to Lonestar at 5.5 cents on the dollar gives you an idea for the true value of some huge portion of this stuff. Even writedowns of just 11% on the Level II and III assets would wipe out Lehman, without even considering the true value of the rest of its assets in this lousy environment.

Look for a Bear Stearns style giveaway of the core brokerage, advisory and money management operations to some big bank, while the Fed covers the losses on the riskiest assets. Since JP Morgan already got a handout, maybe Goldman or Bank of America is at the front of the line for these scraps.

Greenspan, Poole and Paulson have all chimed in saying that the Fed shouldn’t finance any sale of Lehman, but that is a smokescrean, because the sale itself isn’t the issue. Any Fed assistance will be to back up Lehman’s debt so that someone is willing to buy the stock ‘with their own money.’

Since there is a lot of resentment out there from the BS and GSE bailouts, our hustlers-in-chief may use some kind of obscure arrangement whereby the taxpayer’s obligation isn’t readily apparent, but is burried in the footnotes. This would allow them to redeem themselves as champions of the free market with the help of compliant editors and producers in the propaganda outlets.

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