Lehman is not worth a penny.  I believe Lehman is insolvent.

The government is trying very hard to find a buyer.  The question is whether Lehman is worth anything.  Lots of assets are impaired.  I expect that Lehman has a negative net worth, apart from its franchise value.  If nobody buys Lehman then they will collapse.  If there is a Chapter 11 bankruptcy, then we will have a run on the system.  So, hopefully it will be bought for its franchise value.

If that doesn’t happen we have a problem. “Lehman is not worth a penny.  I believe Lehman is insolvent.” The government does not want to do another Bear Stearns.  I expect to see a buyer without a formal government subsidy.  The government has already subsidized the banking system in a myriad of ways, starting with the lowering of the Fed Funds rate.

I am a pessimist.  We are in for a severe 18-month recession, which started in the first quarter of this year.  This is the most severe crisis since the Great Depression.  When there is a recovery, it will be short and weak.

The FDIC has only 117 banks on its watch list.  Independent analysts, who make their living compiling and analyzing thousands of data points on the banking system, have estimated that 8% of the 8,500 banks, or about 700 banks, should be on the FDIC watch list.   IndyMac was not on the watch list until June of this year, a month before it went bankrupt.  The list is too short compared to the severity of the crisis.

On top of this, the FDIC is running out of money and will need a big recapitalization.  They have already gone to Congress to ask for more money.

A very conservative estimate is that approximately 110 banks, representing approximately $900 billion of assets, will go bankrupt.  About half of these assets will be impaired, representing a fiscal cost of $450 billion.  It is hard to tell but, as I mentioned, these forecasts are coming from analysts that follow the banking system very closely.