The phones at Lehman Brothers must be ringing off the hook. Callers to their offices this afternoon were greeted with a recorded message which said,”You have reached the offices of Lehman Brothers. Due to heavy call volume you may receive delays longer than usual. Please hold for the next available operator.”

Heavy call volume? Oh, Lehman. We love you guys. Keep your chins up.

Whatever else is going wrong at Lehman Brothers, the firm hasn’t had to tap the Fed’s primary dealer credit facility. A few moments ago the Fed released the latest numbers showing that the discount window for investment banks hasn’t had any drawings at all. This news was somewhat telegraphed by the successful commercial paper offering from Lehman earlier today.
Commercial banks, on the other hand, are borrowing heavily from the discount window.

Update: There has been some speculation that Lehman cannot tap the discount window, either because it lacks adequate collateral or because the Fed has deemed that it is no longer eligible because it is not an ongoing concern. Our sources tell us that this is flatly wrong. The Fed takes a wide variety of collateral, which it values at prices far higher than the going rates in the markets. Lehman has plenty of junk in its trunk to trade for Fed ducets. And the “going concern” thing just hasn’t come up and its highly unlikely that the Fed will turn off this money spigot on that basis.

We don’t know enough about the commercial paper market to know what to make of a report from Reuters that Lehman offered $340 million in commercial paper and placed 75% of it as of late this morning. Is this good news? After all, it shows they can borrow. Or is Lehman scrambling for liquidity and having to restrict its borrowings to overnight money?
We report, you deride.

Well, that didn’t take long. As soon as we floated the rumor about an emergency rate cut, we heard from a “source familiar with the matter” who tells us that the New York Federal Reserve and Treasury are scrambling to find a buyer for Lehman Brothers. Our source says that one possible solution may be to have regulators wave restrictions that have prevented private equity buyers from buying the troubled investment bank. Officials at the Fed and Treasury are looking into whether they may have the authority to grant waivers.
One plan under consideration is to bring in a foreign bank to make the purchase, with additional capital coming from private equity buyers. The situation was described as “fluid to the point of chaos, category 4 hurricane” by the source. Both the Fed and Treasury officials agree that there should not be another Fed backstop to Lehman obligations, one of tools employed to get JP Morgan Chase to buy Bear Stearns.

Update: Andrew Ross Sorkin just also said on CNBC that the Fed is actively helping find a solution to the crisis at Lehman.

Update II: Bloomberg reporting that Lehman is in negotiations with buyers. “Bankers from other firms are reviewing Lehman’s books today, people with knowledge of the situation said, declining to identify the potential acquirers,” Bloomberg says.

Ever since the Federal Reserve arranged for the acquisition of Bear Stearns and opened the discount window to investment banks, the phrase moral hazard has been on everyone’s lips. The idea is that by relieving Bear Stearns investors and creditors of the full cost of Bear’s failure, the Fed encouraged more risky behavior.
Today Michael Lewis proposes a new kind of moral hazard created by this series of moves by the Fed and the Treasury. He says that the bailouts have led market participants to believe that they don’t need to worry about the collapse of another investment bank because the government will step in. Where once Wall Street would have scrambled to prop up Lehman, as it did Long Term Capital Management, now it feels secure enough to watch Lehman go down.

People are enjoying its failure. The pleasure and interest the markets now take in seeing it fail now exceeds their pleasure and interest in seeing it survive.
This is one of the many unintended little side effects of the government bailout of Bear Stearns Cos.: to greatly reduce the interest of the people who do business with Lehman Brothers in the survival of Lehman Brothers.
All those people whose affairs are intertwined with Lehman might have pressured them to handle their problems more briskly and intelligently — and might also be trying to keep it afloat. The U.S. government has made it possible for them to instead stand back and watch with some detachment and even pleasure as Lehman collapses.
After all, the Federal Reserve will give them their money back, re-insure their credit defaults, take another pile of these distressed assets out of the market. And when the dust settles they can go in and poach Lehman’s business and its smarter employees.

Lehman’s stock is down another 40% this morning.
Joyous Loathing at Lehman Brothers’ Collapse: Michael Lewis [Bloomberg]

When we woke up this morning to await the news from Lehman Brothers we fully expected to spend the rest of the day exploring the question: who is next? Candidates such as Merrill Lynch, Wachovia and Washington Mutual would get batted around the same way attention turned to Lehman after Bear Stearns fell.
But we didn’t do that. It turns out that Lehman is still next. Talking to traders and money managers today made it all too clear to us that the news today has not extinguished questions about the viability of Lehman. The lack of details about financing and other aspects of the commercial real estate spin off, worries about where profits will come from, the non-plan and non-strategy to raise capital, the long delay in the announcement and suspicions that Lehman may employ some fancy accounting to reduce the size of its losses were all cited by folks we spoke with. Lehman is still the most vulnerable firm on Wall Street.
Everyone is saying that, at best, Lehman may have bought itself some time. But money managers we spoke with today agree that Lehman doesn’t have the balance sheet to afford to buy much of anything, not even time.

Dick Fuld may have earned his nickname “the Gorilla” for the aggressive way he stalked the trading floor at Lehman Brothers but the CEO may now be recasting its meaning by holding on to the troubled investment firm and its assets, unwilling to let them go at a price would-be buyers are willing to pay. Looking at pictures of Ghana, the ll year old gorilla in a German zoo who toted around her deceased son for days before allowing zookeepers to remove the corpse, we couldn’t help but think: she’s just like Fuld.

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