How many billions are Paulson and Bernanke asking for? Seven hundred billion dollars. Now that's real money! And the administration is touting this new program as if they knew what they were talking about.

We have heard folks wondering how and why Treasury Secretary Paulson should be given the power and discretion to do as he sees fit with this bailout money.

We have heard people speaking about the pain and the injustice, along with the doubts and reservations about the concept of giving away so much money.

Actually giving this handout to companies that have demonstrated such corrupt thinking and irresponsibility (see SEC opens the gates and the world drowns) is a supreme injustice given that their decisions led to the collapse of once-mighty financial industry titans. See Lehman Bros 158-year sad ending for just one example.

Has anyone asked how the Treasury came up with that number? Can someone explain the difference between $700 billion and a blank check?

Almost two months have passed since I posted Serious Money: Tempting fate with 10 financials - the results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak, or so I thought. Now things are even worse, much worse, and a new market bottom was reached only last week.

Trying to predict where this market will go is not possible, but there are many ways to play it. I chose to buy into a pool of financial stocks, believing the survivors would post gains that would overshadow the losers.

When I last updated this story, the pool of stocks was up 26%. Things have gotten worse, but the group is still up 13.89% plus the dividends. This is better than any of the indices, although it is much more speculative.

There was plenty of big news since the last report. While Lehman Brothers Holdings (OTC: LEHMQ) went bankrupt, MBIA Inc (NYSE: MBI) made up for it by more than doubling. Meanwhile, Merrill Lynch (NYSE: MER) is in survival mode supported by a Bank of America (NYSE: BAC) buyout offer. Seven stocks are up, two are down and one is gone (returns from July 29 prices):

The New York Times reports that the Federal Reserve has less reserves. Specifically, a year ago it had $800 billion in reserves and that number is down 63% to $300 billion. The other $500 billion is "encumbered" -- that's a nice way of saying that instead of being invested in "safe" Treasury bills, the Fed owns the assets of American International Group (NYSE: AIG), $29 billion worth of grubby former Bear Stearns collateralized debt obligations (CDOs) and the like through a little something it calls "Maiden Lane LLC", and tens of billions worth of the same from Lehman Brothers Holdings Inc. (NYSE: LEH) and other banks.

I raised the question of Fed solvency in July. Whether it was solvent then, it is less so now. But is there a limit to how much money the Fed can create to fund itself? With demand for Treasury Bills skyrocketing (albeit at interest rock bottom interest rates of 0.14% for the 1-month bill), it looks like now would be a great time for the Fed to replenish its coffers by issuing a trillion dollars worth to shore up its balance sheet. If it can indeed do that, the downside is that these low rates will pay it very little income.

And assuming that the Fed does not want to be in the business of owning half a trillion worth of encumbered assets, it will eventually need to get rid of them. And in so doing, it could find itself in competition with the ever- dwindling portion of the investment banking and insurance industry which the government does not own. How so? Because the Fed will be competing to get the best price for the assets it is trying to sell.

Will it use its power to put those publicly traded companies in a pickle? Or will it forgo the advantage to the taxpayer so its competitors can profit? Beats me.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG shares and has no financial interest in the other securities mentioned.

TheStreet.com's Jim Cramer says all that can really help us now is time.

Yeah, I trust it. Sure.

That's what everyone is saying today. They see the futures and they are now conditioned to "fade" it, to go against it and just be glad to get minuscule higher prices than you could get yesterday.

I am no different. Last year when the Fed started injecting funds like crazy with the rest of the world, we had a real lift.

But there is so little confidence now that we can't possibly be comforted this time around.

The fright of yesterday, where people trusted only T-bills because anyone who had money with Lehman (NYSE: LEH) (Cramer's Take) international or owned their debt was just killed -- thanks to Dick Fuld for not taking that Korean bid -- won't go away in one day.

The notion of opportunity, of actually buying something and watching it go up, seemed to vanish. I don't think the SEC's decision to enforce an old law will cut it, and I am now repulsed by the chorus calling for the uptick rule -- even though that's my position -- because they all sound like sore losers.

Evergreen Solar, Inc. (NASDAQ: ESLR) plunged to an all-time low of $3.30 on Tuesday, thanks to the widespread ripple effect caused by Lehman Brothers' bankruptcy filing. As Evergreen confessed to a potentially substantial Lehman-related loss, analysts rushed yesterday to hand out price-target cuts. Today, Citigroup bucked the trend by upgrading ESLR from "sell" to "hold."

The bullish note seems primarily based on increased transparency regarding the Lehman situation, as well as a sharp decline in the stock's valuation. In a note to clients, Citigroup clarified, "With ESLR more clearly defining its exposure to a Lehman Bros. bankruptcy, the worst-case scenario is now well-defined . . . these issues appear much better discounted at current levels."

In response to the upgrade, ESLR has added more than 13% today. The shares are trading around the $5 mark, though, which puts them in territory not previously explored since May 2005. The stock's year-to-date loss now totals 75% -- a stomach-churning plunge, for sure, but the stubbornly bullish sentiment among investors suggests that more downside may be in store for Evergreen Solar.

TheStreet.com's Jim Cramer says they had no idea how catastrophic pulling the naked-shorting rules would be.

Christopher Cox and his crowd of academics and theoreticians did more to destroy the confidence of this market with their adherence to free-market destruction of stocks than any of the managements of the companies themselves.

I know that is a strong statement, but you have to understand that the rules against naked shorting and shorting without upticks were about having firebreaks in the system. Consider these rules a swath of chopped-down trees meant to slow a fire so firefighters have a real chance to put out a monster conflagration.

Let's take AIG (NYSE: AIG) (Cramer's Take). Here's a company that has lots of liabilities but also lots of assets. While its liabilities are liquid -- meaning it has to pay them off quickly if there is an event that triggers payment -- its assets, such as its great life insurance and aircraft leasing businesses, are illiquid. AIG couldn't just turn around and sell them.

Still, new management came in at AIG and decided to work on a plan, meant to be revealed at the end of September, that would detail asset disposals that could make the company a more solid credit with an ability to make good on their policies on financial instruments. It would also be able to access capital in the markets once those illiquid assets were disposed of.

"It is a popular myth that financial markets are based on principles of capitalism," observes Ron Rowland in his All Star Investor newsletter, adding, "but the opposite is closer to the truth."

Assessing what he calls the Federal Reserve's moves to "buy Wall Street," he offers a straight-forward overview of the current situation and a "peek behind the curtain" of free markets and Wall Street.

"Banks, brokers and insurance companies are assisted and protected by a wide variety of governmental mechanisms.

"Wall Street propagates the myth of 'free markets' because it serves to obscure the truth, which is that their profits are earned at the expense of those with less sophisticated and well-funded Washington lobbying operations. You are now getting a peek behind the curtain.

"Yes, it is true that Lehman Brothers (NYSE: LEH) was denied government assistance and is being allowed to fail. In fact, Lehman is now serving as a kind of scapegoat that allows those in power to appear firm in their resolve not to put taxpayers at risk.

"If it were more than mere appearance this would be good news, given that taxpayers have already taken on plenty of risk with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The reality, however, is that the bailouts are continuing through other, less obvious means.

In the midst of what historians will likely view as the worst financial collapse in a century, it is hard to know what will happen next or what to do about it. This weekend Hank Paulson drew a line in the sand -- refusing to put the Treasury in the middle of the Lehman Brothers Holdings Inc. (NYSE: LEH) bailout which caused Bank of America (NYSE: BAC) and other bidders to pass -- and now Lehman and Merrill Lynch & Co., Inc. (NYSE: MER) are gone. (Although Bank of America's $50 billion Merrill buy could be a Pyhrric victory -- its stock is down 13% in pre-market). But now the Fed is, in effect, stepping over Paulson's line in the sand by accepting that same collection of junk that caused Lehman to fail as collateral from Wall Street in exchange for Fed money.

The Wall Street Journal reports that the Fed is expanding its lending facility for Wall Street banks. In addition to getting money from the Fed after posting collateral such as bonds, mortgage-backed securities (MBSs), collateralized debt obligations (CDSs) -- the banks can now get money for posting equities as collateral. To translate into English, after permitting two of Wall Street's biggest names to go under, the government is realizing that it may have made a mistake. It is now back in the business of bailing out Wall Street.

But this means that the Fed is becoming Wall Street's garbage collector. So when it takes MBSs, CDSs, and stocks as collateral, it is risking taxpayer money because in all likelihood, this collateral could be worth much less than its face value. But wait, there's more. The Fed is being joined by a $70 billion lending facility created by some banks to help bailout their brethren. And one analyst expects 110 banks (out of 8,400) to fail by July -- that would account for $850 billion in assets out of $13 trillion total.

Reuters reports that Bank of America (NYSE: BAC) just announced it was withdrawing its interest in Lehman Brothers Holdings Inc. (NYSE: LEH) -- likely sealing Lehman's fate. But it is still interested in buying an investment bank. Now, the Wall Street Journal reports, Bank of America is in pursuit of Merrill Lynch & Co., Inc. (NYSE: MER).

As I posted earlier this afternoon, Bank of America's decision to dump Lehman increases the odds it will file for bankruptcy. But the Journal writes, "Bank of America and Merrill Lynch & Co. Inc. are in merger discussions, according to people familiar with the matter. Much remains uncertain and conditions were fluid."

That is an understatement. But Merrill could be a difficult bull to swallow. As I posted, it has salable assets worth $40 a share and is currently trading at $17. But nobody seems to know how much Merrill's liabilities would subtract from that $40 a share. And when Bank of America is done looking at Merrill, it could reach the same decision it did with Lehman.

Update. DealBook reports that Bank of America could offer $25 to $30 a share for Merrill -- a big premium -- and the deal could be closed by tonight. If so, that would be great news in my humble opinion.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Lehman Brothers Holdings Inc. (NYSE: LEH) is likely to file for bankruptcy today. The reason is that the Treasury and White House are smarting from criticism of their $29 billion bailout of Bear Stearns and the $200 billion to $800 billion Fannie and Freddie nationalization. Neither of these moves has stopped the serial sell off in the shares of investment banks and other firms saddled with crumbling real estate assets. So now the powers that be have decided that they'll tighten up their moral standards and refuse to bailout Lehman.

As I posted, the basic problem is that Wall Street thinks the Treasury will cave in and put money into the Lehman bailout. But despite reports of a proposal to hive off the good part of Lehman from the bad part -- financed by other Wall Street banks -- such a resolution does not appear likely. That's because Wall Street does not want to risk its slim capital shoring up Lehman's bad part -- $85 billion worth of commercial real estate and mortgage-backed securities (MBS). These banks rightly fear that they would lose their investments and sink the entire industry in the bargain. In addition, these bad bank financiers don't want to provide the backstop to enable the winner of the bidding on the good bank to surpass them by picking up Lehman's assets cheaply.

Assuming that plan does not work and that the government refuses to step in to finance the bad bank, this leaves two basic options: Lehman files for bankruptcy or other banks liquidate Lehman in an orderly fashion. Bankruptcy might be a relatively orderly process. According to FOXbusiness, "if Lehman entered into bankruptcy protection, the brokerage units would enter Chapter 7 liquidation and a court-appointed trustee would liquidate the firm's assets and give customers back their money. Generally, securities a customer holds at a brokerage firm are legally the investor's property, and aren't exposed to the claims of the firm's creditors." A bankruptcy would likely wipe out Lehman common shareholders.

So what's an investor to think? Last Friday I seemed clever buying Washington Mutual (NYSE: WM) on a dip (Chasing Value: Are you watching WaMu?) only to be crushed a few days later when Meridian Capital's Alan Fishman CEO, was announced as Kerry Killinger's replacement and bad news about Lehman Br Holdings (NYSE: LEH) became cement shoes around WaMu's feet all week.

Yesterday I stood by Friday's rationale, but took the hit for the down stock on the unknown cash-flow issues based on Wall Street's questioning WaMu's potential difficulty funding ongoing operations until it returned to profitability. See: Chasing Value: Not -- WaMu one week later - ouch!

By the end of the day the stock was up 21% as Washington Mutual tried to soothe anxiety. It backed up it's claim of stability by challenging the rating agencies to look over its books so that they could verify that WM currently had liquidity levels in excess of regulator requirements, and that it should not have a problem maintaining operations based on current levels of capital. Nevertheless, all the ratings agencies downgraded the company.

Lehman Brothers Holdings Inc. (NYSE: LEH) stock has lost 45% of its value in early trading, it has rebounded somewhat since and was only down 30% by midday trading. It fell 7% on Wednesday and 45% on Tuesday. Now the price of insuring its bonds is hitting new records. Can it last the week?

Bloomberg News reports that the price of Lehman's so-called credit-default swaps (CDSs) -- a kind of bondholder insurance -- is hitting record levels and requiring an unusual upfront payment. "Contracts protecting $10 million of Lehman debt for one year cost 11 percent upfront and 5 percent a year, according to CMA prices at 8:50 a.m. in New York. That's up from 1,200 basis points at the close of trading yesterday. The price means it costs $1.1 million in advance and $500,000 a year to protect the bonds compared with $1.2 million a year yesterday," according to Bloomberg.

It's worth understanding CDSs because their rates are more sensitive indicators of a troubled company's financial health than its financial statements, which are often full of unstated assumptions designed to make things look better than they really are. "Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite," writes Bloomberg.

Lehman Brothers Holdings Inc. (NYSE: LEH) lost 45% of its value Tuesday; its market value is currently 21% of its reported net worth of $26 billion. At $5.4 billion, that market capitalization is a bit more than half the $9 billion value that BusinessWeek estimates its Neuberger Berman asset management is worth. But its announcement this morning of a $5.92 a share loss and its intent to raise capital did not impress investors who are driving its stock down another 7% in pre-market. [Please note update at the end of post].

Why? Lehman's numbers were worse than expected. Reuters reports that Banc of America's Michael Hecht increased his "third-quarter loss-per-share view by 39 percent to $4.80, [and he thinks] that a Bear Stearns-like bailout will likely leave little value for common stockholders of about $2 per share." So its actual results were $1.12 worse than Hecht expected. This came after a second quarter in which "Lehman lost $2.8 billion in the second quarter and was forced to raise $6 billion in new capital," according to the New York Times.

The real problem, though, is that Lehman's strategic initiatives struck investors more as the intent to raise capital rather than actually getting the cash. MarketWatch reports that Lehman intends to sell 55% of its Neuberger Berman asset management division, to spin off its $30 billion commercial real estate division into a public company, to sell $4 billion of its UK residential real estate, and to cut its dividend by 5 cents.

On Monday, Lehman Brothers Holdings (NYSE: LEH) fell 13% after announcing a management restructuring. Some speculated that investors were disappointed because the management changes suggested that Lehman's well-publicized talks to sell a stake to Korean financial interests had failed. CNNMoney confirms this morning that those talks have ended.

CNNMoney interviewed the chairman of Korean Development Bank (KDB), which "sent a proposal to Lehman to buy 25% of [Lehman] for as much as $5.3 billion," who confirmed that talks had ended but did not make it clear why. (Such a deal would have been a 116% premium to its current market value). As CNNMoney wrote, "The two companies have been discussing the possibility of KDB taking a stake in Lehman but Korean regulators had been cautious about the deal. Jun told Dow Jones Newswires that the talks were now over, but he declined to say what conclusions, if any, had been reached."

CNNMoney also reports that no other Korean financial institutions wanted to join KDB. It reported that "all major financial institutions in South Korea - Kookmin Bank, Woori Finance Holdings, Shinhan Financial Group and Hana Financial Holdings - said that they weren't interested in joining a consortium to invest in Lehman due to economic uncertainties on the local front."

But yesterday, the failure of those talks had not been announced yet. They were only inferred. Did someone trade on the knowledge that the talks had failed? It might be worth investigating.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

BBC News reports that another hedge fund has closed down thanks to its failure to bail out of the oil speculation trade that boosted oil to a peak of $147 in July. This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest -- particularly since his former employer Goldman Sachs Group (NYSE: GS) was a big beneficiary of this speculation -- or ignorant of reality.

The hedge fund in question this time is Ospraie Fund, which invested in commodities like oil and gold. It "has lost 38% of its value since the start of the year." Gold is down 22% to $800 from its $1,030.80 an ounce high in March. Oil has tumbled 25% to $109 since peaking in July, according to BBC News. But 1440 Wall Street suggests that the biggest commodity culprit in Ospraie's demise was copper's tumble. The lesson here is that if a sufficient number of big money speculators get together and decide to, say, short the dollar and go long commodities, there will seem to them to have safety in numbers.

But when the government started investigating the cause of spiking oil prices, the trade got very unprofitable very fast. As I posted, the Commodities Futures Trading Commission (CFTC) recently found that 81% of oil trading volume was driven by speculation. Then we witnessed the failure of SemGroup and the indictment of Optiver Holding for manipulating energy prices -- those funds who were too slow to reverse their positions and got creamed.