So far there is no agreement on LEH. Emerging scenario is that LEH files bankruptcy on Monday. Best alternate scenario garnering some interest is: "divide it in two companies a good and bad - Barclays buys good and 10 to 15 Wall Street firms absorb the losses of the Bad". BAC has essentially opted out of the process at this point (maybe countrywide was a good lesson for them) and ironically, it seems unlikely to me that Wall Street will willingly JUST absorb losses from the LEH bad bank. Additionally, MER and AIG need to raise cash. Rumor is that AIG needs 30 to 40 billion. God knows no one has access to 30 or 40 billion any more - and especially for a firm that can not get its story straight. WM and WB are still milling around without a paddle and do not look like they will be addressed right now. One way or the other if a deal does work out you can count on the fact that the fed has already funded it through its alphabet soup and may use some more of that soup while stressing that it did not tacitly backstop an agreement. The reality is that it has aready backstopped LEH.

If this playsout according to the worst expectations, we may get an emergency rate cut early in the week (thought there was a chance of that on Fri depending on how things went) and then we will catapult lower - welcome to hell next week. If the LEH deal does not happen to walls streets satisfaction - the fed will definitely have to do something to attempt to ease the blow and show the resot fo the world they are not asleep at the wheel...as useless as a cut would be...it would mainly serve to reinforce how bad things actually are and how out of control the fed is. Honestly I hope it does not happen...I think a cut right now would send the market MUCH lower than no cut. Jim Cramer has it all wrong - but i have to say Paulson and bernake engineered one hell of a crisis. Without their gamesmanship and antics I think the markets would have crashed long ago and we would have found the guilty parties, valued their assets and already begun piecing together a solution that could have been a building block.

As we stand right now, we exacerbated the problems by lending more money 500 billion from the Fed directly or indirectly through swaps or tax breaks...and it will not be repaid. Does anyone really think that LEH is going to repay its trading loans borrowed from the discount window if they go away. What about their asset swaps? I don't think so.

The TSLF loans that have been made by the fed have been extended and extended and most banks have been granted payment forgiveness entirely. Can you imagine that most banks have not made ONE payment to the fed on Billions and Billions of dollars. Also, the 28 day swaps of treasuries for Garbage...have NOT in a single case been rolled up. The Fed still holds the crap and the banks are still trying to fake their books with the tacit approval of the Fed and Govt by showing high quality assets instead of garbage on their balance sheet. This is why the fed does not want to publicly contribute more backstop money...they are already doing that and they are not going to get paid back. All of this is not good for the Feds balance sheet and they can not afford it. They just don't have enough money. 50%+ losses for the fed to take in short amounts of time are not easy to metabolize. 

GE will be a huge problem for the markets next week and may need a capital raise also. Finding 200 billion for a few large firms is not going to be easy...in fact its going to be impossible....especially, when we know we are going to have to find another 200 billion in a few months.

Think europe, think Asia, think russia and think middle east. Greed, corruption and extreme climactic bullishness inspite of failures are coming home to roost. Just look at the Chinese Olympics as an example. These guys spent money they did not have and so did every chinese guy who setup shop expecting a BOON to his business and lost his entire life savings on a topping event with just too much positive expectation. Most thought they would get totally filthy rich off the event - reality was their restaurants were empty...for example one prime location had a full staff of waiter sitting idle every day...finally the owner sent 7 to 8 of them home while the remaining 3 or 4 sat around waiting for a customer or served the one or tow who came in. The chinese business people spent their life savings in many cases to prepare to the primal and ultimate bull market event. The chinese government spent tons of money trying to change the weather - ultimately getting the military to deliver anti rain chemistry over  a several thousand mile area just so that it would not rain on the fireworks on the closing ceremony and that everything in china can look just perfect. This is the definitions of climactic! Well except the stock market which is down 60%. Nice divergence there right. Te middle east, Russia and Mr Putin are demonstrating similar climactic reactionary behaviour.

This crisis is spreading fast and you can expect to see some very tall dark and rusty towers falling apart on man made islands in Dubai soon.

Even if the Fed and Treasury pull a miracle out of their hat on this one at the last minute...the next casualties are waiting in the wings and the slippery slope has been breached...so, they could (though i think it is unlikely) stave thing off for a week or two...but they can not fix this thing anymore.

Buckle your seatbelts...

ps: sorry for the long winded post.