Global Financial Crisis (Was: Subprime Meltdown)

[Prime95]

Originally Posted by garo

This is so not an issue where you want to point a finger at Democrats.

I didn't point a finger at the Democrats for Fannie's and Freddie's failures. I'm predicting the Democrats will exacerbate the problem now that the two companies are under government control. The Republicans don't care one whit about low-income mortgage holders, but the Democrats do. I hope I am wrong, but I stand by my prediction that the cost to U.S. taxpayers will only get worse from here.

[cheesehead]

Christian Science Monitor Editorial Board's take:

"The Big Secret in U.S. Housing --
What is the US Treasury's plan for Fannie Mae and Freddie Mac in case of federal takeover?"

http://www.csmonitor.com/2008/0825/p08s01-comv.html

Voters aren't likely to hear much before the election about plans to end government support for two giants in home finance, Fannie Mae and Freddie Mac. Yet like house prices, the federally backed entities are on the skids – as is the whole idea of Washington continuing to aid investment in a market often treated like a big bet.

But a political campaign is the perfect time to ask candidates what should become of Fannie and Freddie – and the implied federal credit they enjoy that allows them to borrow at low rates, buying and reselling "bundled" mortgages on global securities markets on behalf of private investors.

Politicians don't want to face such an issue, as it strikes at the heart of federal support for a now-precarious home mortgage scheme that benefits mainly the middle class.

But such a question must be asked as share prices for these "government-sponsored enterprises" have plummeted in recent weeks and the two face difficulty in selling debt. The crisis over their existence may come to a head before November.

The primary cause is uncertainty over the vulnerability of their multi-trillion portfolio to the rising number of home loans that never should have been made to risky buyers. But since July 30, when Congress gave the US Treasury a blank check to buy a controlling share, if need be, in the two if they falter, investors have also become uncertain over how much of a haircut they would take if – or once – Treasury takes over these enterprises.

The authority given for a potential purchase of Fannie and Freddie is turning into a self-fulfilling reality. Famed investor Warren Buffet says, "the game is over." Meanwhile, the big secret is Treasury's post-takeover plan for the two and what Congress also might expect.

Will the two entities be temporarily nationalized, broken up into small companies and sold off – with no implied federal credit? Will a much-smaller version of the two be created to support home-buying for only the poorest Americans?

These are not small questions for the housing and financial markets. Fannie and Freddie own or guarantee about half of the $12 trillion mortgage market, not so much out of public need but because they've learned how to lobby Congress to keep them growing – on behalf of shareholders.

Taxpayers need answers if billions are to be required in a potential crisis or if Congress and Treasury plan to maintain Fannie and Freddie in their present form. Yet debate in the campaign is negligible.

The Depression-era days when a market for reselling mortgages needed federal help are over. And Fannie and Freddie don't lower interest rates enough to justify the risk they pose to financial markets if they were to implode.

Nor should a government-backed entity be allowed to use its profits to lobby lawmakers on behalf of shareholders or be able to pressure the housing industry into lobbing on its behalf.

Americans have been misled by decades of government help for mortgages to count on their homes as a piggy bank rather than simply as a house to live in. Now a historic decline in prices is a wake-up call for a debate on whether home ownership deserves to be a drain on tax dollars. Fannie and Freddie are ripe for such a debate.

[garo]

Well I think that it is far better that low-income Americans - who pay a higher proportion of their income as taxes than the wealthy - benefit from any bailouts instead of corrupt bankers or people who "invested" in Fannie and Freddie with the full knowledge that stocks and bonds do decline in value and can go to zero.

So the Democrats may make the problem worse but it was already pretty pretty bad! We stand at the cusp of a major breakdown of the US financial system and by god the people behind the system brought it upon themselves.

PS: Instead of predicting how Democrats will make the problem worse, why not spend a bit of time on how the Republicans created the problem?

[ewmayer]

Nice pair of article by Fortune's Colin Barr on the implications of the unprecedented government intervention in the troubled GSEs this past weekend [both of these are excerpts - click links for the full text]:

Fannie, Freddie: The biggest losers: Investors in Fannie Mae and Freddie Mac face massive losses when trading opens Monday.

By Colin Barr, senior writer
September 7, 2008: 2:03 PM EDT

NEW YORK (Fortune) -- Big investors in Fannie Mae and Freddie Mac face a brutal Monday. Shares in the mortgage giants, which have already lost 90% of their value over the past year, are likely to plunge anew in the wake of the government's announcement Sunday that it is taking control of the companies and ending the payment of common and preferred dividends.

Common and preferred shareholders won't be outright eliminated, as some had feared. But while the shares will continue to trade, it may for investors be a distinction without much of a difference.

Under the "conservatorship" plan announced Sunday by Treasury Secretary Henry Paulson, common shareholders will also be stripped of their rights to govern the companies.

Given that both Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) have posted billions of dollars in losses during the past year, and that billions more are expected while house prices continue their historic decline, it's not likely that the market will accord much value to shares that give holders no right to select board members or otherwise oversee management.

The list of big losers is long:

Bill Miller, the Legg Mason mutual fund manager, was Freddie Mac's largest shareholder as of July 31, with 12% of the company's stock.

Others Freddie investors include Capital Research & Management of Los Angeles, with a 10% stake as of June 30, and AllianceBernstein and Pzena Investment Management, both of New York, with 6% and 5%.

Holders of Fannie common shares include AllianceBernstein, with 12% of outstanding shares, and Capital Research and Dodge & Cox, of San Francisco, each with 11%, according to data from LionShares.com.

The government said it will recapitalize Fannie and Freddie over time by making purchases of senior preferred stock. The existing preferred shares will continue to trade, the government said, inflicting losses most notably on the regional banks that hold them.

Treasury said banks should ask their regulators for help if they believe losses on Fannie-Freddie holdings cause their capital to fall below required levels - an admission that the prices of the existing preferred shares are likely to fall even from their already reduced levels.

As of 1 p.m. Eastern time, common shares of FNM down 87% to $0.95, FRE down 82% to $0.92. Interestingly, *other* financials rallied hugely at the open today, despite the fact that many big and small banks own major chunks of the GSEs' preferred shares and are going to take a big haircut both on the par value and [even worse for many which relied on the steady income stream] elimination of the juicy dividend. Being short financials in a big way, I'm glad I decided to not get up before sunrise on the west coast in order to check the market-open - it was an ugly first couple hours for SKF holders. However, the rally seems to have quickly lost most of its steam - the big boys were probably heavily selling their long positions into it. It's gonna be an interesting couple of weeks. Nice to have the news of not one but a *pair* of fabulous newly-discovered Mersenne primes to distract me from the crazy goings-on in the markets.


Paulson changes the rules of the capital game: By taking control of Fannie and Freddie, the Treasury Secretary risks making it harder for other troubled financial firms to raise money.

By Colin Barr, senior writer
September 8, 2008: 7:44 AM EDT

NEW YORK (Fortune) -- Treasury Secretary Henry Paulson has tamed the two-headed housing-market beast known as Fannie Mae and Freddie Mac - but not without adding to the uncertainty swirling through the financial sector.

Paulson announced plans Sunday to put Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) under government custody, including replacing their CEOs, ending common and preferred dividends and creating a new class of preferred stock that will be senior to existing shares - meaning existing shareholder stakes were made less valuable.

The move aims to assuage bondholders' fears about the creditworthiness of the companies, and to persuade the foreign central banks that have been big buyers of Fannie and Freddie bonds that their investments are safe.

If investors buy into Paulson's program, mortgage rates should fall because Fannie and Freddie's borrowing costs will fall. That, in turn, could lessen the steepness of the decline in home prices.

But with the economy slowing and the U.S. financial system under severe stress from the collapse of the housing bubble, it's not clear that even full government backing for Fannie and Freddie will bring mortgage rates down substantially.

And, Monday's financial sector rally notwithstanding, Paulson's action carries risk: By raising questions about the terms on which the government intervenes with companies deemed too big to fail, Sunday's action could reduce access to private capital for struggling financial firms.

That the markets had their doubts about Fannie and Freddie is no secret. The 90%-plus plunge in their shares over the past year shows there was substantial doubt about the companies' finances over the long haul.

A surprise move

Yet Sunday's placement of Fannie and Freddie under government ownership nonetheless came as something of a surprise. In contrast to Bear Stearns, the brokerage firm that ran out of cash in March and was dashed off in a Fed-brokered fire sale to JPMorgan Chase (JPM, Fortune 500), Fannie and Freddie had plenty of cash on hand and weren't on the verge of collapse.

Indeed, though critics of Fannie and Freddie have long warned that the companies were too thinly capitalized - they hold or guarantee $5.4 trillion of mortgages, on less than $100 billion of capital - the government's own oft-repeated position, until Sunday, was that Fannie and Freddie would be able to continue in their mission of providing liquidity to the housing market without the feds riding in to the rescue.

Paulson himself said in July he didn't expect to have to use the authority Congress was handing him to buy shares or debt in the companies. What's more, Fannie and Freddie were deemed well-capitalized that month by their regulator, James Lockhart, who at the time headed the Office of Federal Housing Enterprise Oversight and now runs its successor, the Federal Housing Finance Agency.

What was most surprising about the timing of the government intervention was that the rules governing the FHFA's relationship with Fannie and Freddie - rules adopted only in July, with the passage of legislation creating the agency as a new "world-class regulator" for the companies - specify the terms of a government intervention. The rules say the companies must fall below certain capital thresholds for the government to have the right to take them into a conservatorship.

Paulson didn't make any substantive comment about the companies' capital levels at his press conference Sunday. And while the FHFA is expected to release a report on the companies' capital standing soon, there has been no official finding that their position is inadequate, even though Lockhart hinted in his statement Sunday that the companies' capital had been found wanting. He spoke of "frank exchanges regarding loss projections, asset valuations, and capital adequacy" with the top officials at Fannie and Freddie.

Like me, Mike Shedlock is highly skeptical even of the "possibly several tens of billions of dollars" worst-case estimate of the eventual cost of the FNM and FRE bailout to the U.S. taxpayer - I believe the bidding here starts at a couple hundred billion, and agree with George that, assuming a not-outrageous 20% haircut on the roughly $5T combined mortgage portfolios [with the pain possibly being spread among the GSEs and the banks holding the mortgage-backed paper], a trillion-dollar worst-case estimate is not unthinkable. And if housing continues to fall nationwide, as it well may, all bets are off, because then even now-current-on-their-payments "prime" loans will start to go sour in large numbers, as ever-increasing numbers of homeowners find themselves deep underwater. The bottom line is that while this massive bailout ensures that the GSEs will continue to function in some shape or form, it does nothing to solve the underlying problem, namely that the largest debt-fueled speculative asset bubble in history is continuing to unwind itself, and that housing is *still* overvalued in a big way relative to incomes and to any reasonable historic norms.


And since we didn't award a Moron-of-the-Week last week, I'm going to do it retroactively and give it to CNN/Money's resident delusional permaBull, Paul LaMonica, who once again gets it dead wrong:

Why Wall Street loves the bailout: The takeover of Fannie and Freddie removes a huge cloud over the markets and could be a sign that the economic pain is closer to the end than beginning.

That commentary is laced with wide-eyed optimistic sound bites from other like-minded permaBulls - apparently, these folks all drink from the same happy-pills-laced Kool-Aid.

[R.D. Silverman]

Originally Posted by ewmayer

<snip>

.

WaMu just dumped their CEO. Want to bet whether he got a
golden parachute as an award for being a total screw-up???????

[ewmayer]

Originally Posted by R.D. Silverman

WaMu just dumped their CEO. Want to bet whether he got a golden parachute as an award for being a total screw-up???????

I haven't been able to find an article that spells out what his compensation for 2008 is likely to be, but given that earned over $14 million last year, he's not likely to be terribly hard up in any event ... unless he invested last year's bonus in bank stocks, that is. :)

[Prime95]

Originally Posted by ewmayer

The takeover of Fannie and Freddie removes a huge cloud over the markets and could be a sign that the economic pain is closer to the end than beginning..

That's the exact same quote we got for the Bear Stearns bailout.

[ewmayer]

Originally Posted by ewmayer

I haven't been able to find an article that spells out what his compensation for 2008 is likely to be, but given that earned over $14 million last year, he's not likely to be terribly hard up in any event ... unless he invested last year's bonus in bank stocks, that is. :)

...But it`s nice to know that at least the ousted CEOs of the two GSEs will be having nice soft landings:

WSJ | U.S. Seizes Mortgage Giants

At Fannie, Herb Allison, who formerly served as chairman of the investment company TIAA-CREF, succeeds Daniel Mudd. Freddie's chief executive, Richard Syron, was succeeded by David Moffett, who has been vice chairman and chief financial officer of U.S. Bancorp.

Potentially, Mr. Syron could walk away with an exit package totaling as much as $15 million, said David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay and a possible payment of $8.8 million to compensate for forfeiting recent equity grants. A Freddie spokesman said Mr. Syron had said he doesn't "anticipate receiving nearly that much."

Mr. Mudd's exit package, including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price. The value of that stock could fall sharply, however.

Love the bit about Syron "forfeiting recent equity grants" in exchange for a trifling $8.8 million cash on the barrelhead: "OK, OK, I hereby agree to forfeit my right to sell a whole bunch of now-nearly-worthless Freddie stock in exchange for a gigantic wad of cash ... twist my arm ... the government simply gave me no choice but to take the money in exchange for the still-useful-as-wallpaper shares." Yep, this is the harsh Darwinian world of Big Finance at work.


A nice "no free lunch" article about the GSE bailout/takeover from Fortune:

Professional Bailout Number Six

Monday brought a sense of deja vu in the markets. How many financial sector bailouts can we have in one year? Quite a few, apparently. Six times in the last 13 months, the game has changed or appeared to change due to political intervention in the markets. Let's review:

August 2007: The Federal Reserve makes emergency cut in the discount rate

December 2007: Fed announces creation of special lending privileges for banks

January 2008: Another emergency 75 basis point rate cut

March 2008: Bear Stearns bailout

July 2008: First Fannie/Freddie rescue attempt

September 2008: Another Fannie/Freddie rescue attempt

The latest action effectively brings Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) under governmental control. Existing shareholders in these institutions are not, to our surprise, being totally wiped out--yet. There is still plenty of time for that to happen.

There is an even bigger loser in this transaction: anyone who owns U.S. Treasury bonds. Interest rates spiked higher, leaving the principal value of government debt sharply lower than it was last week. This is perfectly logical. Having just taken on the massive obligations of Fannie and Freddie, the Treasury's own credit rating had to take a hit. There are no free lunches.

In the big picture, the government's goal is clear: drive down mortgage rates and, more important, convince bankers to actually lend money to people who want to buy houses. Wholesale mortgage rates dropped dramatically Monday morning, so by that standard we have to say the bailout is doing what it is supposed to do. Whether the new liquidity will trickle down to individual borrowers is not yet clear.

Will the sixth bailout be the charm? The record of the last year is not very encouraging. Each action brought a market rally, but the rallies have been getting progressively weaker and shorter each time. As noted above, there are no free lunches. Risk cannot be eliminated, but it can be moved around. What is happening now is that the losses in the mortgage market are being transferred to what may be the only larger fixed-income sector: U.S. Treasury securities.
Special Offer: Play the market rally with fundamentally sound companies that are temporarily out of favor. Go with the help of professional money manager John Buckingham. Click here for the complete model portfolio.

Since other kinds of bonds take their cue from the Treasury market, the bottom line is that interest rates on all kinds of debt will rise so that those who lost money in mortgage debt can be saved from loss. Is this a good thing? Maybe. But whatever it is, it is not capitalism. It is not what happens when markets are allowed to operate freely and without interference.

In a free market economy, people bear the cost of their own decisions, for better or worse. With that principle out the window, who will be next? This precedent is now in place: If an industry proves that its continued functioning is crucial to the economy and its failure will bring widespread pain, it is entitled to be saved from its otherwise inevitable demise by the collective action of society. The automobile industry is already making noise along these lines. Other applicants will no doubt follow.

For now, stocks are rallying around the globe. Monday morning's opening surge faded with remarkable alacrity, though, suggesting that at least a few investors remain skeptical. We count ourselves among them.

And here is legendary Hedge Fund manager Jim Rogers' take on the Fannie and Freddie Follies:

US Is "More Communist than China": Jim Rogers: The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is "more communist than China right now" but its brand of socialism is meant only for the rich.

[ewmayer]

UK Jobs outlook weakest in nine years

The outlook for the UK jobs market is the weakest for almost a decade with employers freezing new recruitment as business confidence plummets, according to worldwide research published on Tuesday.

A survey of more than 55,000 employers in 33 countries by Manpower, one of the world’s biggest recruitment companies, reports that hiring intentions in the UK in the final quarter of this year are the weakest since the beginning of 1999.

The jobs market, however, is faltering globally. Employers in three-quarters of the countries surveyed reported that hiring intentions were weaker than three months ago while two-thirds said that they were worse than a year ago. The outlook for recruitment is worst in Spain, Ireland and Italy.

Hiring intentions in the US, where the unemployment rate rose last month to a five-year high of 6.1 per cent, are also the weakest since 2003. The UK, however, has replaced the US as the economy considered to be at greatest risk of a severe downturn, according to the Organisation for Economic Co-operation and Development.

U.S. Account Deficit up by $246 billion in a year: Congressional Budget Office cites 'substantial increase in spending' and 'halt' in tax revenue growth. Also says it will add Fannie and Freddie to future estimates.

The $407 Billion 2008 deficit cited by the article is in fact a joke, because so many things are kept off the books - the cost of the Iraq war, for instance - and others are papered over using the "Social Security Trust Fund Surplus" accounting scam. But the quarter-trillion-dollar increase is probably fairly reliable - absent the potential cost of the Fannie/Freddie bailout, of course, and the big-bank-bailouts that are likely to come. [Which are all part of Henry Paulson's self-proclaimed "Banks must be allowed to fail" strategy. Yes, banks who take on excessive risk and make speculative bets which go spectacularly wrong must be allowed to fail ... Just not on his watch, as long as Congress gives him a blank check on the taxpayer`s dime, apparently.]

[ewmayer]

Battered Lehman to announce results Wednesday: After shares were decimated Tuesday, the battered Wall Street firm says it will announce quarterly results and unveil 'key strategic initiatives' at 7:30 in the morning Wednesday.

NEW YORK (CNNMoney.com) -- Beleaguered Wall Street firm Lehman Brothers will unveil "key strategic initiatives" for the firm, along with its expected third-quarter earnings, tomorrow morning before the market opens.

The investment bank's shares hit their lowest level in more than 10 years Tuesday as investors grew ever more concerned about the company's future. Earlier in the day, Standard & Poor's placed Lehman (LEH, Fortune 500) on CreditWatch with negative implications.

Note this highly interesting tidbit from later in the same article - this is "the law of unintended consequences" at work in spades, as a direct result of the Treasury`s forcing Fannie and Freddie into conservatorship, which includes suspending the preferred-share dividends:

The Treasury Department's busy weekend, in which it placed collapsing mortgage guarantors Freddie Mac and Fannie Mae in a conservatorship, also served to shut down one of the favorite capital sources for troubled financial companies: the preferred security market. When Treasury suspended dividend payments on $30 billion of Fannie and Freddie preferred stock, investors began to sell preferred stock investments across the finance sector.

Government Payments to Wall Street for Auction-Rate Debt Wreck Escalate: Government officials are letting Wall Street banks pull off what makers of defective cars, computers and condos can't. After the collapse of a product banks created and controlled, they're charging the customers for repairs.

The customers include taxpayers from New York to California, as well as not-for-profit institutions such as hospitals and universities. They sold auction-rate bonds, whose interest rates were set in periodic bidding. Since the market for those bonds began to fall apart last year, the issuers have had to pay an extra $2 billion in interest.

Now the borrowers are on the hook for possibly billions more in underwriting, legal and other costs for replacing the bonds with less expensive debt, according to data compiled by Bloomberg. Most of the payments are going to the same banks that ran the auctions and are accused by New York Attorney General Andrew Cuomo and states' securities regulators of understating the risks to clients. Investors have been promised $55.3 billion in refunds. Taxpayers aren't getting the same break.

``It's sad that taxpayers are paying the costs,'' said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board, an industry-controlled group based in Alexandria, Virginia. ``If they knew what was going on, they would be indignant.''

Across the country, public-sector borrowers had $166 billion in auction-rate debt. They have refinanced or made plans to do so for at least $103.7 billion of it, or 62 percent, Bloomberg data show.

New York's Costs

To exit the securities, New York -- the biggest state issuer of the debt with $4 billion -- has so far spent $138.4 million. That's equal to the annual salaries and benefits for 900 state jobs being eliminated because of a budget crisis, plus the cost of preschool education for 20,000 children.

Including the initial costs of selling auction-rate bonds and higher-than-expected interest, the state's total extra expenses will climb to at least $340 million, according to state data compiled by Bloomberg. The state sells bonds to fund prisons, roads, mental-health facilities and economic development projects.

Ultimately, the government and nonprofit borrowers may end up paying Wall Street billions of dollars in refinancing fees, depending on how issuers replace the debt. If their costs were to match New York's, the tab would exceed $7 billion, not counting higher interest rates.

...

Auction-rate bonds were invented more than 20 years ago by Ronald Gallatin, a now-retired Lehman Brothers Holdings Inc. banker. They let companies borrow for as long as 40 years while paying short-term interest rates set by bidders in periodic auctions. The public sector began participating in the market in the late 1990s.

From 2000 through 2007, local governments and operators of hospitals and schools paid banks $650 million to market the bonds, based on Thomson Reuters data.

On top of that, banks charged as much as $400 million a year to run the auctions, which they propped up by making bids for their own accounts.

`Money-Making Opportunity'

In the first two months of 2006, for example, bids submitted by UBS prevented 85 percent of the municipal auctions it ran from failing, according to court documents in a civil suit filed in June by Massachusetts Secretary of State William Galvin on behalf of investors.

When investor demand evaporated and the banks reeled from losses on securities tied to subprime mortgages, they quit bidding. In mid-February, the market caved, triggering penalty interest rates as high as 20 percent. Borrowers turned back to Wall Street to refinance the bonds.

``We have a money-making opportunity,'' Seema Mohanty, a former investment banker at Zurich-based UBS and now a consultant in Pelham, New York, wrote in a Feb. 14 e-mail disclosed in the Massachusetts suit. ``They are desperate,'' she said, referring to issuers that wanted to get out of the bonds.

Government officials haven't been clamoring for relief or publicly criticizing Wall Street. Anglin, the New York budget director, said the market's failure was ``an almost entirely unexpected event.''

"Almost entirely unexpected" = BullSpeak for "As soon as the credit markets began to seize up, this was bound to happen."

[ewmayer]

Lehman suffers nearly $4 billion loss: Lehman Brothers suffered one of its worst quarterly losses in the company's history, reporting a loss of nearly $4 billion Wednesday, and announced a series of drastic steps aimed at reviving the beleaguered firm.


CNN/Money's Paul LaMonica seems to have cut back on the "delusional PermaBull happy pills" for this one:

Lehman: Too big to fail?: 11:11am: Wall Street's tepid reaction to the investment bank's plan to raise capital might mean the Fed will have to save Lehman just as it did Bear Stearns

NEW YORK (CNNMoney.com) -- Lehman Brothers has finally announced a path to raising capital. But after Tuesday's 45% plunge in its stock price, it's unclear if Wall Street will let chief executive officer Richard Fuld carry out the plan.

Lehman's (LEH, Fortune 500) stock was down about 2% late Wednesday morning after the company said it would slash its dividend, look for a buyer of the majority of its Neuberger Berman investment management unit and spin off part of its commercial real estate business.

Shares are trading at their lowest point in 10 years, having plummeted nearly 90% so far this year. And by the way, the company lost $3.9 billion in the third quarter.

So now, the natural question that needs to be asked is this: On the heels of the Treasury Department's takeover of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), does the government now have to step in and bailout Lehman as well.

Unfortunately, it may have no choice.
Talkback: Do you think Lehman should be allowed to fail or does it need to be bailed out?

The Federal Reserve set a dangerous precedent in March when it helped engineer the takeover of Bear Stearns by JPMorgan Chase (JPM, Fortune 500) by agreeing to guarantee $29 billion in potential losses.

Since then, several Fed members, most notably chief Ben Bernanke, have gone out of their way to defend the action, arguing that Bear Stearns simply was too big to fail. The repercussions of allowing Bear to collapse could have been catastrophic.

So if Bear was determined to be too big to fail, isn't it likely the Fed would think Lehman is as well?

Probably. That's because Lehman, the fourth-largest investment bank, is bigger than Bear, which was the fifth-largest at the time it nearly imploded.

What's more, Lehman, a bond-trading powerhouse, is even a bigger player in the mortgage-backed securities market than Bear was. So the Fed could easily argue that letting Lehman go under could create even more chaos in the already volatile credit markets.

Yes, Fuld wants to keep the bank independent by taking a piecemeal approach to breaking up the company. But the market may not let him do so.

And until Lehman actually announces that it has, in fact, raised a substantial amount of capital, it's likely that there will be continued pressure on the stock.

If Lehman's stock falls further, it's reasonable to think that some financial institution would take a gamble on buying the company, especially if it could get Lehman through a "takeunder" just as JPMorgan did with Bear.

Some analysts have tossed out investment manager BlackRock (BLK, Fortune 500), British bank HSBC (HBC) and private equity firm Blackstone (BX) as potential bidders.

But why would any of them agree to take on all the risk without some assurance from the Fed? After all, that's exactly what JPMorgan got in the Bear deal.

Don't get me wrong. I don't like the notion of big Wall Street firms getting saved after making irresponsible, reckless decisions. In what's supposed to be a free market, companies should be allowed to fail.

But the Fed has already opened Pandora's box. It's too late now to say that Lehman should be left to wither away to nothing while Bear was allowed to escape that fate.

To be sure, if one of the three aforementioned firms were to try and buy Lehman and wanted the Fed's help, this would be more complicated than the JPMorgan takeover. BlackRock and Blackstone aren't banks. And HSBC is not a U.S.-headquartered institution.

Still, Bernanke and Fed vice chairman Tim Geithner have demonstrated a remarkable willingness to be flexible and creative in dealing with the credit crunch. So if they wanted to help someone buy Lehman, one would think they would find a way to get it done.

Like it or not, the age of the bailout is in full swing.

"remarkable willingness to be flexible and creative" = "No hesitation whatsoever in putting the taxpayer at risk in order to bail out their Wall Street Bankster Buddies". And Paulson is now the King of that game - maybe Bernanke and Geithner are eager to steal back the big-bailout limelight.