Too big to bail out

da TheStreet.com, 14/09/08
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"The policy of 'too big to fail' crossed over into 'too big to bail out,' once we allowed the massive housing bubble to occur," says Bill Fleckenstein, president of Fleckenstein Capital, a short-seller who believes the possibility of a full-blown depression cannot be overlooked, as the government takes on more and more debt.

"The possibility is non-trivial that that is the outcome," he says.
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The cost of insuring against $10 million worth of U.S. government debt jumped from $18,000 to $22,000 last week, as measured by the credit default swaps market, indicating investors see a greater risk of what was once unthinkable: the U.S. government defaulting on its debt.
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Ladenburg Thalmann analyst Richard Bove wrote in a research note Friday that BofA is the most likely buyer for Lehman. If a buyer does not emerge for Lehman, however, the government will have to choose between taking over another failed institution, lending to it indefinitely in the midst of a panic, or letting it fail.

Many fear this last option would send shockwaves throughout the global financial system, as Lehman has untold obligations to institutions around the world, mostly through the credit default swaps market, where parties bet on and insure against debt defaults by large institutional borrowers.

A default by Lehman would create a "huge unknown" according to RealMoney contributor and Cavanaugh Capital Management managing director Tom Graff, as many institutions that thought they had insured against various liabilities suddenly had to take those risks back on their books.

"I don't think that's going to be acceptable to the Treasury," Graff says.
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