Rescue of Lehman in the offing - and we're not out of the woods yet

To those who believe we are out of the woods regarding the financial crisis on Wall Street, things only seem to be getting bleaker.

Now we have the spectacle of the Fed jawboning big banks on Wall Street to bail out Lehman Bros which is  evidently teetering on the edge of collapse while demanding that they come up with a "plan" to halt the bleeding:

Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.

Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.

Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next.

To say that this doesn't concern Main Street is just not true. A cascade of failures on Wall Street would dry up credit in this country so fast, even the government and the Fed working together would have an enormously difficult time preventing a general financial meltdown that would have reprecussions worldwide.

Meanwhile, the big banks are "playing chicken" with the Fed and with Washington:

But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.

Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm's assets. In this high-stake game, they may also be trying to call the government's bluff, knowing that if push came to shove, it would provide financial support.

Mr. Geithner, who led the session, firmly stood his ground. He told the banks that this was about fixing the system and preventing the crisis from worsening.

If this is true, we may be in for a very bumpy ride. In the end we come back to the question that was asked of Bear Stearns as well as Fannie Mae and Freddie Mac; are some financial entities just too big to allow to fail?

We'll probably get our answer next week.