The fear is palpable, but not as palpable as the cynicism

The question is, if handed a Lehman, is there anyone out there willing to try to make Lehman-aid?

The sky over Wall Street has been full of buzzards, but the easy pickings they have been circling for are not the bare bones of Lehman Bros., but the juicy fat of the US Treasury, or its sterling (ha!) credit rating. So far, it is looking like the fat stuff is staying away, keeping some kind of respectable moral hazard distance.

The reporters and bloggers at the WSJ are breathless:

MarketBeat: The Mother of All Mondays

Barclays, which had come to be viewed over the weekend as the most likely bidder for the badly ailing Lehman, pushed away from the bargaining table on Sunday. The main impediment appeared to be that the U.S. government is reluctant to backstop a deal, as it had amid the Bear Stearns meltdown in March.

DealJournal:

For months, Treasury Secretary Hank Paulson has been drilling one point hard: moral hazard. The government wasn’t going to rescue risk-takers.

But what if regulators’ plan backfired and the government itself became a cause of moral hazard? That is, what if the government’s roles in this year’s bailouts resulted in companies believing the Treasury or Federal Reserve would step in with financing no matter how dire the situation?

The day before, the DealJournal was almost sanguine:

Executives walked into the Fed dressed casually. One man entered in jogging clothes. J.P. Morgan executive Steve Black and Steve Cutler, J.P. Morgan’s general counsel, left the building early Saturday afternoon in a black sedan. Mr. Cutler was carrying a manila envelope thick with papers. He exited through the heavily guarded garage entrance at the corner of William Street and Maiden Lane, declining to comment on the talks.

JPM’s Mr. Black returned to the Fed at 3:05 pm. He had a Bluetooth device in his ear and was wearing blue jeans, brown loafers, a sea green shirt and a blue blazer with gold buttons.

Also visiting the building was Barclays executive Bob Diamond, flanked by two or three others. He entered at the Fed’s employee entrance on Maiden Lane, wearing a blazer, no tie, and carrying a briefcase.

Outside, it was a normal late summer day in lower Manhattan

And now, WSJ is saying it's no longer a case of Deal, but one of No Deal:

With Barclays ending talks and the government balking at putting any taxpayer money at risk for Lehman, the likelihood of a transaction was dimming. That would leave an orderly liquidation as the most likely scenario, a dramatic outcome for a once-powerful firm.

As word that a Barclays deal was off filtered across Wall Street, credit derivative traders scrambled to unwind their outstanding contracts with Lehman and shift their positions to other banks. CDS traders at many Wall Street firms were told to come to work immediately.

With many trading desks open, investors rushed to buy credit default swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher. One senior trader said Bank of America is offering to face Lehman's counterparties in CDS trades, as long as the swaps don't reference Lehman's own debt.

In a statement on Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" will take place between 2 p.m. and 4 p.m. on Sunday to allow Lehman's counterparties to offset their positions against each other.

The apparently insurmountable obstacle to a deal was reluctance by U.S. regulators to financially back an acquisition or the creation of a so-called "bad bank" to wind down Lehman's assets.

Guambat is struck, and is inclined to strike back, at the repeated characterisation that, somehow, the obstacle to clearing the Lehman lemon is the refusal of the Federal government to pick up the tab for the debacle.

It sounds like the gripe Guambat had in high school: Father Guambat was the obstacle preventing Guambat from cruising around in a shiny new Mustang.

The spin by the Wall Street spinmiesters is that this will only hurt everyone, so to keep such widespread pain to a minimum, the Feds should step in to spread Lehman's debt around for the taxpayers to pick up.

Instead of being bullish on Wall Street, they're spreading bullship on Wall Street.

Guambat reckons he will relish the small bit of pain that will come his way. It will be a relief from the pain of having Wall Street cream off his savings all those years past. It will be an exquisite pain if he knows (not that he will or there's much chance of it, but a hope only) that the Financial Wizards who conjured this credit explosion that was bound to be a credit implosion will cop of bit of the blow-back themselves rather than have it deflected to the hapless Main Street.

There is, after all, no generosity on Wall Street, even for the brethren.

As Evan Newmark, of the Mean Street WSJ blog notes:

Apparently, you can put dozens of Wall Street’s finest into conference rooms at the Federal Reserve Bank of New York, but they can’t rewrite an immutable law of human nature: people act in their self-interest.

Over the weekend, it has become clear that Lehman is a zero sum game. Slice it and dice it. Ring fence asset manager Neuberger Berman. Put the commercial mortgages into a separate vehicle. But the $53 billion of illiquid assets that Lehman has on its books are still bad assets.

Early on the Treasury Department made it clear the U.S. taxpayer doesn’t want these assets. Barclays and the Bank of America don’t want them either. So the Treasury has tried without success to convince Lehman’s Wall Street brethren to take them on.

But why should they?

Imagine you are John Thain, CEO of Merrill Lynch. Unlike Dick Fuld, who has held tight, in July you sold collateralized debt obligations with a face value of $31 billion at 22 cents on the dollar. But you still are capital constrained.

And now you are asked by Treasury Secretary Hank Paulson, the man who didn’t make you CEO of Goldman Sachs, to put up billions of dollars to save Lehman? So that Barclays or BofA can pick up Lehman on the cheap to compete with you? It is humiliating enough that you may soon need one of those banks to bail you out. Indeed, the Wall Street Journal reports that BofA and Merrill are in merger talks.

“unselfish” acts have their limits. Goldman has billions of dollars dedicated to distressed debt situations just like this. It may very well run counter to the interests of Goldman investors and shareholders to subsidize any deal for Lehman.

This is where the Lehman death drama turns into farce. It isn’t a shortage of outside capital that is driving Lehman into bankruptcy. It is the bid-ask spread on its bad assets, or the difference between a buyer’s and seller’s views on price.

Sure, the $53 billion in assets are illiquid, but at some price there is a buyer. Are the assets worth 10 cents on the dollar or 50 cents on the dollar? Dick Fuld was afraid to find out because he knew that at 10 cents, Lehman likely was bankrupt anyway.

Still, there are tens of billions of dollars of Wall Street capital happy to bid for the assets. Goldman, private-equity firms like J.C. Flowers, Kohlberg Kravis Roberts, Carlyle Group, TPG or Blackstone Group, hedge funds, distressed-debt funds and sovereign-wealth funds all have capital. They are just waiting for the clearing prices on Lehman’s assets to get attractive.

Which is why a Lehman bankruptcy makes sense. Instead of a complex game of chicken between the U.S. Treasury and Wall Street, you have a straightforward auction. Lehman is broken up and its assets sold to the highest bidder. Only in this way will each buyer and the seller be able to fulfill its obligation to act in its self-interest.

Yes, but what about the collective well-being of the markets? What about a feared-for financial apocalypse brought about by the unwinding of Lehman’s $600 billion balance sheet?

It may not be pretty, but apparently Wall Street has decided that the price won’t be too steep. Or else, it would have put up the money.