The Financial Times in London is more specific:

Top Wall Street executives and regulators were on Sunday night racing to thrash out a rescue plan for Lehman Brothers as Barclays of the UK, one of two front-runners to buy the stricken bank, said it would walk away unless the US government provided a financial safety net for a takeover.

Barclays said it would withdraw from the race after failing to secure a US government guarantee over Lehman’s potentially huge trading and credit losses. However, in a sign of the increasing brinkmanship over the rescue the UK bank indicated that *a change in the government’s position would bring it back to the table*.

this is getting serious:

Wall Street Prepares for Potential Lehman Bankruptcy Filing

Sept. 14 (Bloomberg) -- A group of banks and brokers began preparing for a potential Lehman Brothers Holdings Inc. bankruptcy filing today, addressing outstanding trades that the company has in over-the-counter derivatives markets.

Financial firms have started ``netting'' Lehman trades on credit, equity, interest-rate, foreign exchange, and commodity derivatives, according to a statement from the International Swaps and Derivatives Association e-mailed to Bloomberg News.

``ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,'' the ISDA said. ``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.''

That is, if A is owed x by Lehman, and Lehamn owes x to B, A and B agree to eliminate Lehman and to say that A is owed x by B.

That's a good thing, but preparing for this means that the likelihood of bankruptcy is not remote.

The more things change, the more they remain ...

This is similar to the collapse of the Bank of the United States in December, 1930. It was spurned as a merger partner by Wall Street banks and it collapsed. The backwash eliminated hundreds of smaller banks across the country.

http://books.google.com/books?id=tW6GLtJ0LwAC&pg=PA326&lpg=PA326&dq=fail...

The problem here is the Fed and Treasury have painted themselves into a corner. Bailing out Bear Stearns and the GSE's have left them with an empty tool box. The bill for Fannie and Freddie is unknown, with Credit Swaps, mortgage- backed security overhang and other expenses yet to be tallied. This amount could count into $500-billion or even much more. With AIG and Citigroup poised to cross the 'event horizon' into deflation's Black Hole ... the government has to carefully husband its resources.

This leaves out the Credit Default Swap markets; this is a $60 TRILLION market!

http://www.prudentbear.com/index.php/component/content/article/38-Featur...

This market overhangs all; is unregulated, opaque with no margin requirement. It ... and the currency swaps markets ... are much larger than the outstanding debt and FX exchange whose risks the swaps themselves were designed to hedge against.

The leverage that inflated these markets a year ago are now working in reverse ... with a vengeance.

gold down .1, silver up .17 , USDX down .46

Lehman to File for Bankruptcy Protection

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

But Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive as a going concern. It will instead liquidate its holdings.

"Going to Bankruptcy Room, now Boss ..."

http://dealbook.blogs.nytimes.com/2008/09/14/lehman-to-file-for-bankrupt...

Fed to take broader range of collateral on loans

WASHINGTON (Reuters) - The Federal Reserve announced a series of steps on Sunday night to boost liquidity and try to avoid widespread market disruptions in the wake of the apparent collapse of efforts to sell Lehman Brothers.

The U.S. central bank said it was broadening the type of collateral that financial institutions can use to raise money and now will accept all investment-grade debt securities. Previously, only Treasury securities, agency securities and AAA-rated mortgage-backed and asset-backed securities could be pledged for loans.

Fed to take equities as loan collateral

WASHINGTON (Reuters) - The U.S. Federal Reserve on Sunday said it would begin accepting equities as collateral for emergency loans for the first time ever, as it laid out a series of steps to calm financial markets and brace for the expected collapse of investment bank Lehman Brothers.