This is turning into a September to remember. With the $200 billion to $800 billion bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) freshly announced on Sunday, this weekend promises a seventh Sunday bailout. Thanks to the market's belated realization that the "ownership society" paired with securitization -- particularly of mortgages -- is a ticket to the poorhouse, any bank that has too much of this toxic waste on its books is vulnerable to a quick meltdown.
How is this playing out? The New York Times reports that with a push from Moody's (NYSE: MCO), which said it would downgrade Lehman Brothers Holdings (NYSE: LEH) -- whose stock fell 42% Thursday -- unless it merged, the Treasury and Fed are trying to arrange a deal by Sunday. Bank of America (NYSE: BAC) and Barclays (NYSE: BCS) have been mentioned as possible buyers. And Bloomberg News reports that they might team up. No doubt bidders will expect a government handout to complete the deal.
Is this the end of it? Probably not. With the 17% fall in Merrill Lynch & Co. (NYSE: MER) stock Thursday, it does not take too much imagination to see that it could be on deck for disaster. Reuters interviewed Malcolm Polley, chief investment officer at Stewart Capital Advisors, who said, "I think the market's telling you that if Lehman is going to go away, Merrill is probably the next victim." And Washington Mutual (NYSE: WM) seems to be in trouble as well -- its stock has lost 92% of its value in the last year and Moody's cut it to junk Thursday after it announced it would add $4.5 billion to its reserves, according to Forbes.
The broader question that bank customers, shareholders and bondholders should ask themselves is why take the risk of doing business with one of these vulnerable banks? Why not take your business to a profitable institution? Doing so would boost the profits of the healthy banks and put the losers out of their misery -- fast. Why does the government feel compelled to prop up banks whose management allowed them to become so vulnerable?
Let the free market vulture feast on its carrion.
Update. Treasury Secretary Hank Paulson has made another one of his bazooka-in-my-pocket claims that he will not put any government money into a deal to buy Lehman. Reuters reports he is "adamant" against another injection of government cash into a bailout. Why? "There are two things that make this different from Bear Stearns. The market's been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process," reports Reuters. The first reason lacks credibility -- the same could have been said about Bear Stearns. As for the second, we will see whether that makes any difference.
Lehman out-donated to Obama by a factor of 3:1 -- DealBook reports it gave "$370,524 to Mr. Obama and $117,500 to Mr. McCain." Could this be why Paulson is giving the back of his hand to a cash injection for a Lehman buyout?