It is an extremely odd concept. Take a bank's mortgage-backed securities and pool them with those of others, then offer loans to keep the new pool solvent.

Yet, such a plan may be in the offing. According to The Wall Street Journal [subscription required]: "In a far-reaching response to the global credit crisis Citigroup (NYSE: C) and other big banks are discussing a plan to pool together and financially back as much as $100 billion in shaky mortgage securities and other investments." The paper adds that the Citigroup plan would create a "superconduit," a fund backed by some of the world's biggest banks that would issue short-term debt and serve as a buyer of securities tied to shaky U.S. subprime mortgages and other assets currently held by funds affiliated with the participating banks.

The U.S. Treasury Department is trying to help the idea along by hosting some of the meetings about the plan. It is obviously in the federal government's best interest to have the banking credit situation improve, especially if the banks can solve their own problems.

The program does seem a bit perverse; banks bailing themselves out by putting together weak assets and selling them at a discount, and at the same time, supporting them with more short-term bank money.

The sub-prime problem has already created strange bedfellows. Bank of America (NYSE: BAC) has made a large investment in Countrywide Credit (NYSE: CFC). At first, the deal looked like a steal for the big bank, but as Countrywide problems mounted and its stock fell, BAC may have come to regret the move.

That is the core of the issue. Will banks that pool weak assets and support them with short-term loans come to regret their own actions? They may if the mortgage disaster gets a lot worse a lot faster.

Douglas A. McIntyre is a partner at 24/7 Wall St.

The nation's fourth largest brokerage firm, Lehman Brothers (NYSE: LEH), reported its August 31st quarterly results this morning. Investors began to breathe a sigh of relief as the numbers beat Street's expectations posting $1.54 earnings per share versus the expected $1.43 EPS. Earnings were 3% lower from last year's results, which were accomplished in an accelerating environment.

Lehman Brothers acknowledged a $700 million hit from "substantial value reductions" in mortgage-backed securities. The investment banking and retail brokerage fees were up 3.1% for the quarter and total revenues were $4.3 billion. Lehman Brothers stated that 53% of its revenue totals came from overseas activities, helping to absorb mortgage-backed securities losses.

Lehman Brothers, once known as a pure trading house, has diversified its revenue stream substantially. Coupled with more than 50% of its revenues coming from international sources, the giant firm has shown it can weather the credit-storm.

The stock is up over 4% today on the relief factor. The next few days will see Bear Stearns (NYSE: BSC), Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) report their August results as well. If Lehman Brothers is any indication, investors may again feel these stocks have come down too much and begin nibbling away on the buy side. The only remaining significant issue is the credit markets and if they have indeed calmed down. If so, the leverage in the business model of the major four firms could begin to re-accelerate earnings in 2008.

Georges Yared is the CIO of Yared Investment Research and the author of Baby Boomer Investing...Where do we go from here?

In a stunning move this morning, Reuters reports that the Bank of England is bailing out England's Northern Rock plc (LSE: NRK), which had the biggest share of the UK new mortgage market in the first half of 2007.

The strange thing about this bailout -- in the form of an unspecified emergency loan from England's version of the U.S. Federal Reserve -- is that Northern Rock forecasts a profit for 2007. Specifically, it now expects 2007 pretax profit $1.1 billion, albeit 23% below analysts' current consensus forecast.

Given this expected profit, why would Northern Rock need a bailout? The mortgage company depends on wholesale financing as the source of cash to lend out to borrowers. And given the weak state of the market for buying packages of mortgages it and its peers originate, it appears that Northern Rock faced a short-term liquidity crisis. The funds it's receiving are at a higher, penalty, interest rate.

NRK shares, already down 50% in 2007, plunged a further 20% in early trade. If there's anyone who knows how wide and deep the problems lie in the shaky global financial network built on mortgage-backed securities, they're not saying.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

American Home Mortgage (NYSE: AHM) options indicate Panic as AHM sells off 24%. The company invests in mortgage-backed securities and mortgage loans. AHM is recently down $2.72 to $10.89 on unconfirmed credit line chatter. AHM announced on 6/28/07 it will take substantial charges for credit-related expenses in the 2nd quarter and withdrew its 2007 earnings guidance. AHM call option volume of 10,996 contracts compares to put volume of 29,783 contracts. AHM July straddle is priced at $2.25. AHM August put option implied volatility is at 183, August put implied volatility is at 205; above its 26-week average of 47 according to Track Data, suggesting larger price risks. AHM puts are priced higher than calls on AHM being difficult to borrow. July options expire tomorrow; July 20th.

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.