Champagne Super Nova

A Wall Street star has exploded! Venerable investment bank Lehman Brothers has filed for Chapter XI bankruptcy protection after failing to find a deep-pocketed suitor or partner. Some on the street believe that the dissolution of Lehman will be conducted in an orderly fashion around the street. I am not so sure. Look for more pain among banks and investment banks.

Word is that major firms were trading "as normal" with Lehman on Friday. Lehman said in its filing that its broker-dealer operations would continue as usual. Yeah right. I am not sure if Lehman would be permitted to pay for trades once CH XI is filed. There could be a ripple effect of settlement failures around the street. Bondholders will recover a substantial amount. Street was thinking between 70 to 80 cents on the dollar. Preferreds are probably toast. LEH swaps look like crap now.I was telling people Merrill will look for a bank partner for months. No one wanted to listen. I wanted to describe all this on Friday, but was not permitted to publish. Merrill investors have dodged a bullet. Owners of CFC A and B should be doing cartwheels. I do not think that BAC is hurting for money if it is buying Merrill.AIG is in deep trouble. I-Lease and Am. Gen. will be ok, beaten up, but ok. If AIG cannot successfully restructure, it could be worse for the street than Lehman.The Fed is expanding its Term Security Lending Facility. Up until now, the Fed would only take investment grade debt securities as collateral. Now it will take common equity as well! The Fed increased its Primary Dealer Lending Facility by $25 billion to $200 billion. Also, a group of banks and investment banks, including C, have created a $70 billion fund to ensure liquidity for the market. How this will work exactly, I am not sure, but it smells like the MLEC which was suggested last fall to bailout SIVs.The Fed's action has made the Government the primary repo market participant. The government did not to bailout anyone, but what does it think accepting anything short of stereos and jewelry as collateral is? Look for financial stocks to get crushed. We are at the precipice of a major recession. This will separate the wheat from the chaff. Only the strong will survive. Weaklings will either be gobbled up by stronger companies or fail.