"Lehman Bros files for bankruptcy"

What's the big deal?

As I commented at C@W;

"... if you look at it sensibly, the losses boil down to good old fashioned unsecured lending* to people who can't repay (primary losses). All these CDOs and stuff are just a way of spreading the risk/losses around (secondary losses), but in theory they don't add to total loss.

It may well be that these losses are sufficient to wipe out the shareholders' capital of all banks, but so what? The banks' core businesses (customer base, computer systems, land and buildings etc) still has some value. And the economy needs banks to function. And the bulk of banks' mortgages haven't fallen in value.

Plan A is to force the banks to raise a bit of capital, write off a bit more of the loans, raise a bit more capital, write off a bit more etc, which is what they have been doing so far but I don't know how much longer they will get away with it.

Plan B must be (short of chaos) for Fed or Treasury or whoever to make banks come clean (in private at least) about losses (primary and secondary so that we can net off double counting) and ask solvent ones to buy up insolvent ones.

To the extent that losses exceed banks' shareholders' capital, you then lop off the next slice of losses from bondholders, if they are wiped out as well, then you only repay depositors** pro rata and so on (so that a solvent bank doesn't get landed with another bank's losses, obviously).

You could fix the whole thing in a few weeks.

* Of course, legally, secured on a house but if the house has fallen in value to less than amount of loan etc.

** I realise that there is a blurred line between bondholders and depositors, but you get my drift, hopefully."