Lehman Brothers files for bankruptcy

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“There are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investments in an economy that on very rare occasions, and this is one of them, it’s desirable to prevent them from liquidating in a sharply disruptive manner,” he said.

Public opinion has come out strongly against another massive bailout only days after the government took responsibility for Fannie’s and Freddie’s gigantic debts.

Democratic presidential candidate Sen. Barack Obama said he is opposed to any government intervention to save Lehman and advocates a private-sector solution. Republican presidential candidate Sen. John McCain has not taken a public position on the Lehman matter.

In the clearest sign that Lehman is headed for the bankruptcy courts in what would be the biggest Wall Street financial failure in decades, the International Swaps and Derivatives Association called for a special session Sunday to try to purge the intricately interconnected credit-default swaps market of insurance deals that would become worthless if Lehman goes bankrupt.

“The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy,” the association said. But should bankruptcy be avoided, it added, any deals done during the Sunday session would “cease to exist.”

How the markets would react to Lehman’s failure is the subject of much debate. Most analysts feared it could cause a major disruption in the credit-insurance market, which was the reason behind Sunday’s special session.

The broader stock and credit markets also may react negatively. The one certain thing is that Lehman’s own stock will plummet, erasing what little value it had at the end of trading on Friday, when it closed at $3.65 a share.

One loose end from the fruitless weekend negotiations was the fate of an estimated $85 billion in bad loans Lehman has on its books. The company sought to separate those out and sell them, but found no buyers, and the government was unwilling to make them more salable by providing a guarantee.

Some analysts fear that if the loan portfolios are sold at fire-sale prices in bankruptcy proceedings, that will lead to further steep write-downs of similar loans on the books of nearly every other U.S. bank and financial institution, possibly triggering another round of deep losses and bank failures.

But many other Wall Street analysts have concluded that a Lehman bankruptcy can be absorbed by the financial system without great damage.

“Six months after Bear, regulators should have ensured that a smallish investment bank could go under without systemic damage,” said Richard Beales, analyst at BreakingViews.com. “If Hank Paulson and company feels the need to step in, it suggests that years of deregulation have locked in a government backstop for Wall Street’s risk-taking.”

“Lehman has a negative net worth,” said Peter Morici, business professor at the University of Maryland. “Most other banks need all the cash they have to cover their own bad securities, and any money they put into a crippled holding company would likely just be lost.

“It is time to toss in the towel on Lehman, unwind the counterparty trades and march it through Chapter 7,” he said.

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