After last week’s bailout of Fannie Mae and Freddic Mac I really thought was the final swan song for the debacle of the home mortgage industry meltdown. Nationalizing the two institutions I felt would likely end the free fall of the mortgage credit markets and provide some breathing space.

The market rallied exactly one day.

The next day - Lehman Bros. took a nose dive, re-igniting the free fall of many of the larger banks who have not yet demonstrated they are adequately capitalized to survive the loan-losses and reserves necessary for the continuing write downs.

Moreover, just a few hours ago, Senate Democrats called on the two institutions - Fannie Mae and Freddie Mac to immediately freeze foreclosures on mortgages they hold.

Senate Democrats charged that the troubled home loan giants, seized by the government Sunday, should instead work to help struggling borrowers stay in their homes, four senators say in a letter to the firms’ new chief executives and the regulator now controlling them. They’re calling for a 90-day freeze on foreclosures.

Yesterday, Lehman Brothers CEO Dick Fuld offered up a radical plan to save his beleagured firm. The market was not amused. The stock is down considerably from the opening this morning.

The firm’s announcement that it will sell 55% of its money management franchise, which includes Neuberger Berman, and spin off almost $33 billion in distressed real estate securities has clearly been interpreted as “too little, too late.”

Moreover, it is clear to me that the market has decided - Lehman is going to die.

The fear among traders is best expressed in the rising price of Lehman credit default swaps. Traders at hedge funds and rival investment banks have pushed the price of insuring a $10 million block of Lehman debt to unsustainable levels… which could make it impossible for Lehman to raise capital.

According to FORTUNE online, as of early afternoon, it cost an investor $650,000 to insure a $10 million block of the firm’s debt for one year. Earlier in the day, buyers of Lehman insurance were required to pay up to $790,000, several times the cost of insuring other investment banks’ debt. The pullback was attributed to rumors of Lehman’s discussions with would-be buyers.

It should be noted that these swap trading levels show that traders are discounting the liquidity offered Lehman from the Federal Reserve’s primary dealer credit facility.

You may recall, after Bear Stearns tumbled in March, the Fed began making loans available to institutions like Lehman that it didn’t directly regulate, as it does banks. That trading window still remains open to non-depositor institutions and Lehman, among other investment banks, have continued to leverage against the Fed funds as a temporary source of liquidity.

Betting that Lehman topples, despite the availability of government liquidity, goes against one of the oldest axioms of Wall Street: Don’t Fight the Fed.

But with the Fed and the Treasury still digesting the $30 billion it guaranteed in J.P. Morgan’s purchase of Bear Stearns, as well as the government’s conservatorship of Fannie Mae and Freddie Mac, it may not be willing to guarantee the debt of another major institution.

All this and more… with the threat of a Washington Mutual implosion drawing ever closer on the horizon.

Washington Mutual is the largest Savings and Loan bank in the US.

Washington Mutual also seems to be in the same death spiral as Lehman Brothers. While Washington Mutual has appeared troubled for months - its shares have plunged more than 90 percent the past year - recent events have brought it to the forefront of Wall Street’s concerns. Since Monday, the stock price has been halved. On Wednesday it closed at $2.32 per share, down 30 percent. According to Bloomberg, the cost to protect Washington Mutual’s debt hit a record high. Bloomberg said Washington Mutuals’ credit-default swaps are trading at a price “that implies a more than 90 percent chance the company will default within five years.”

If Washington Mutual fails - it could easily be the largest S&L failure in US history.

Meanwhile, home owners continue to wonder if their house price will ever stop being in free fall and it appears that the US and worldwide financial markets continue to roil.

Is this the end? Only time will tell - but it seems we’re in for another round of government intervention, emergency lines of credit, and Fed acrobatics. Eventually it will be the “end” because - like all banks, even the Fed will eventually run out of reserves.

Possibly Related Posts:

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