I wrote about this quickly unfolding story earlier in the day,

The future of Wall Street – in the gutter?

(it’s time for me to hit the sack, but not before posting about Lehman’s demise).

You know, what?  The just published OP-ED by Paul Krugman, titled -  Roulette in the New York Times explains what happened and why,  it’s bye, bye Lehman – big time.

“… To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.

The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were.

And as the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs. These don’t look like the old-fashioned version: with few exceptions, we’re not talking about mobs of distraught depositors pounding on closed bank doors. Instead, we’re talking about frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk. But the economic effects — a freezing up of credit, a downward spiral in asset values — are the same as those of the great bank runs of the 1930s.

It’s going to be a very interesting few days we have coming up.   According to Krugman:

“…Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.”

“… And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes.”

Most of this happened due to not having regulation on non-depository lenders – like Lehman and Bear Sterns, to name a few.

Hmm … who’s responsiblity was that?  Who was cutting back bank regulation in 2002-2003?   I’m not saying it’s the sole responsiblity of just one party, but the ruling party, the party in power – is the main bearer of responsibility for this debacle.

It’s they, the Republicans, that led us into all these bank failures.

And it’s not just the “liberal media” reporting it now – the Wall Street Journal just published a story about it too – Crisis on Wall Street as Lehman Brothers Totters, Merrill Lynch Is Sold, AIG Seeks to Raise Cash.

The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. toJ.P. Morgan Chase & Co.p; Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.

I found a video on YouTube that explains what has happened so far and what could happen in the near future – and the reality is the FDIC is near collapse, too.  Sure, the FED can rescue it, but only at the risk of fueling inflation.

The Economic Collapse has been happening, paradoxically, in Slow Motion – but seems to be ramping up.   Yes, today will be an interesting day, probably memorable, though not in the best way, I suspect. Here’s a story about what is happening to the FDIC, by the way: