From very early on I have held the belief that we are not in the middle of a banking collapse, rather we are in the middle of a market correction. It is also important to separate banks that are going under from the likes of Freddie Mac, Fannie Mae, Lehman and AIG. While all can be tied to the same cause, they fall into three separate categories.

Category 1

The retail banking industry, where you and I have our money, has seen 11 organizations close to date. Closures were directly connected to bad debt and an inability to provide liquidity for all deposits within the bank. It important to note, deposits in such banks are federally insured up to $100,000 per account.

Category 2

The recent bankruptcy of Lehman Brothers, a money center bank, falls into the commercial category. They are not a retail bank, nor did they do retail business, which means the government did not need to utilize the Federal bank insurance fund to cover monies. Again, the failure was tied to illiquidity due to bad debt.

Category 3

AIG is neither a retail bank nor a money center bank (brokerage) but an insurance provider to a number of industries, including banking. The liquidity crunch currently facing this organization is due to the insurance underwritten to cover banks debt (both retail and brokerages). No FDIC coverage, no “man on the street” unable to obtain his or her money because of the situation.

Retails banks will continue to fail due to bad debt, and would even fail in good markets due to mismanagement, I think it would be hard to say we have a banking collapse unless people were having difficulty obtaining their money. At that point we would truly be facing a banking collapse, which is why I am concerned to see that the Federal bank insurance fund dwindling and regulators consider options for replenishing it.

From the article:

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Basically, if a large retail bank goes under the FDIC is out of money and needs to find additional funds, most likely in the form of a loan from the treasury. What happens, though, if several large retail banks collapse at the same time?

The FDIC predicts difficulty with one large retail institution; several closings could cause a shortage of funds available to the public. Take it on step further – what if the FDIC cannot obtain the money from the government in order to cover the deposits?

This is what a true banking collapse would be.

With the Lehman bankruptcy filing it was a foregone conclusion that the stock market was going to be hammered today. The DOW opened down almost 300 points – Energy, Basic Materials, Conglomerates and Financial were hit the hardest.

This is a sell due to Lehman along with falling oil and weakness in the dollar, but what a sell off it is. Just focusing in the Investment Services sector for a second, look at where stocks sit as of right now (11AM ET)

Lehman Brothers (LEH) – 0.20 – down 94.4%
AIG (AIG) – down 42%
Bank of America (BAC) - down 15.23%
UBS AG (UBS) – 17.83 – down 13.44%
Morgan Stanley (MS) – 34.16 – down 8.25%

AIG is in the downward spiral Lehman was facing, all this because of exposure to bad debt with real estate. Based on reports in the media AIG is searching hard for funding and may not be able to avoid a liquidity crisis.

One has to ask where will the pain end? Ironically, the answer seems to be when the housing market stabilizes. It’s funny the investment instrument that helped create the current situation may be the thing that can put a stop to this mess. The only issue is that it may be a long time off…

Nothing like waiting to the last second – Lehman Brothers, at 1:21 AM ET, says that it was unable to find a buyer for the firm and that it intends to file for Chapter 11 bankruptcy.

With this news, which was expected, the sale of Merrill Lynch to Bank of America, and markets are falling around the world in response to the Lehman, as well as a crashing dollar, Monday will be a very interesting day on Wall Street.

Talk about a wild day on Wall St. – Lehman Bro. is on the verge of bankruptcy and Bank of America has agreed to buy Merrill Lynch at $29 / per share, which is a $12 premium over Friday’s close.

Why the buy-out of Merrill and not Lehman?  While Merrill is also facing a number of debt issues, much like Lehman, their assets are considered to be superior to Lehman.  Merrill Lynch has $1.6 trillion in asset management.  Also, this purchase will allow Bank of America the ability to take Merrill’s 49.8% stake in BlackRock which has more than $1 trillion in assets under management.

This means Monday will see the transformation of Wall Street – Lehman will, most likely, go under and Bank of America will purchase the 94 year old institution known as Merrill Lynch.

Not a bad purchase on B o A’s part for $44 Billion.

Wall St. woke up and saw the writing on the wall for Lehman Brothers (LEH) this past week.  Thinking bankruptcy was a distinct possibility; investors sold off the stock letting the price fall roughly 77.4% in the last five days alone.  So, where does this leave us?

Starting Friday evening, members of the Federal Reserve and Senior Management of Large US banking concerns were meeting to discuss a purchase of Lehman.  The Government made it clear no funds would be provided to save the bank, nor would they subsidize the purchase for any interested party.  Does that mean anything at this point?  Just a few weeks ago they said Freddie Mac and Fannie Mae were not going to be supported with Government funds either.

As the weekend continued on Barclays bank, out of the U.K., emerged as a potential buyer of Lehman but decided against the purchase when the U.S. government would not offer to limit the potential losses. This means, as of right now, no known buyer is stepping up to make the purcahse.

Right now it looks as if Bankruptcy is the only way out, but what other possible – all be it slim fates – may await Lehman?

• Another buyer is found who is willing to pick up all liabilities
• Another buyer is found but the Federal Reserve will help support the purchase by funding a portion of the sale or accepting some of Lehman’s liabilities
• No buyer is found; bankruptcy takes place, causing possible panic on Wall St.

The big reason the Fed wants to resolve this issue over the weekend really means a Lehman collapse has the potential to throw the market into a panic and bring other banks down in the process, but the Street seems to think otherwise.  With the pending collapse of Lehman is that the money markets do not seem to be concerned with what is occurring.

Is it a bankruptcy?  Is it a buy-out?  Is it a buy-out with government support?  Let’s see what Monday brings…

Others covering:

Chartsandnumbers – Lehman Brothers Fate
Lehman Brothers Weekend Opera @ Ruleboy
nahnopenotquite.com – Lehman to be Liquidated?