Lehman, AIG, Merrill Lynch and the Catastrophic Ripple Effect

If Lehman does actually just “go out of business”, I believe it will be the straw that breaks the camel’s back, even though everyone already seems prepared for the worst. The risk that I think will turn into a panic, is that of counterparties that do business with these names. It may be like a room full of cockroaches when the lights go on Monday morning-or should I say when the lights go off.

Here is what is being reported by Dealbreaker:

Gloom Descending On Wall Street As Worries About Funding Good Bank/Bad Bank Plan For Lehman
Posted by John Carney, Sep 13, 2008, 8:00pm

The meetings between Federal Reserve officials, senior bankers and regulators to discuss a rescue of Lehman Brothers ended without any clear resolution to the situation. At least some at the meetings now believe that Lehman may be beyond rescuing, and that the focus when the meetings resume tomorrow should be on an orderly unwinding of Lehman. A good bank, bad bank plan has been worked out but it’s unclear if Wall Street banks can provide adequate capital to fund the plan.

Although the formal meetings are over for the evening, across Wall Street executives and regulators continue working. New York Fed President Timothy Geithner is still at the bank’s headquarters, according to the Wall Street Journal.

“A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street,” the Journal reports.

CNBC reports: “Under the terms of the proposal, which could still blow up, all the major Wall Street firms would pitch in $30 billion total to purchase Lehman’s bad real estate assets and create what’s knows as a ‘bad bank.'”

We understand that as early as last night a major focus in the meetings has been addressing the possible domino effect from a Lehman being toppled. Many other Wall Street institutions have large counterparty exposure to Lehman, and a liquidation of the firm could be costly. The stock drops at AIG and Merrill Lynch on Friday are a major source of concern.

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