Stand By For The Next Federal Bailout

It’s been widely reported that Timothy Geithner (the President of the New York Fed) summoned a group of Wall St. and banking CEOs to a pow-wow in lower Manhattan on Friday evening, with Treasury Secretary Paulson in attendance.

The subject: Lehman Brothers, the 158-year-old investment bank which is in dire need of new capital, partly because of losses in its large portfolio of commercial (not residential) real-estate investments.

Reports have it that Geithner essentially told the assembled CEOs that they would have to find some way to resolve the situation, possibly by hammering out a plan to buy up Lehman’s assets. You may recall that Geithner’s predecessor Bill McDonough did something very similar, almost ten years ago to the day, resulting in a partnership that took over the Long-Term Capital Management hedge fund.

In 1998, the only thing the Fed paid for was coffee and sandwiches. (They hosted the meetings so they would be held on neutral turf.)

Today, given both the precedent of the Bear Stearns collapse, and the fact that Fed discount-window lending is now available to Wall St. firms, it’s by no means certain that the Fed and/or the Treasury won’t be partners in whatever deal emerges for Lehman Brothers this weekend. As with Bear Stearns, any government participation would most likely involve the guarantee of investments or derivatives that are illiquid, hard-to-understand, of questionable credit quality, or all of the above.

Several times in the last few days, Secretary Paulson got out his daddy face (which is darned intimidating, let me tell you) and said that the government will not commit any public funds to guarantee any part of Lehman Brothers.

That’s a very good position to take, because we’ve been bailing out one thing after another this year, and it has to stop sometime.

Right here would be a great place to draw a line in the sand. We don’t really need Lehman Brothers to survive in its current form, 158 years of history or not.

The biggest problem with Paulson and Geithner’s position is that they don’t have a lot of leverage. Lehman’s competitors would be perfectly happy to see Lehman (and their CEO, Richard Fuld, who has been faulted for not addressing the problems long ago) go the way of Bear Stearns.

Unfortunately, I think Paulson is going to blink. It’s going to be yet another interesting weekend in finance-land.

-Francis Cianfrocca