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The New York Times is reporting (via DealBook) that Lehman will file for bankruptcy this evening. [Ed.: It's now official - see Lehman press release (.pdf)]

The story notes that the Federal Reserve will take lower quality assets as collateral for loans and a consortium of banks will provide financing to assist an orderly liquidation of the company.

I am not sure that one can have an orderly liquidation of a company which has been around for a century and a half. This is confirmation, proof positive, that we live in a most troubled time.

One week ago we watched and cheered (I did) as the Treasury rescued Fannie Mae (FNM) and Freddie Mac (FRE). That effort provided only the briefest interlude of calm in the markets. There is some historic climax to this series of crises lurking just around the corner. At every twist and turn in this year-long saga, the result which has ensued has always been the worst case scenario. We are, I believe, headed for a very, very ugly end to this story.

The government has not been able to hold back the forces which have taken down financial giant after financial giant. Capitalism demands pain. Good risk is rewarded and imprudent risk is punished. We were engaged in an orgy of imprudent risk taking for nearly a decade and now a heavy price will be paid for the violation of so many simple and common sense precepts of trading.

I truly fear for our economy and our system the next several days.

Futures plummet.

• • •

The Federal Reserve has expanded the type of collateral it will lend against at the Primary Dealer Lending Facility.

Separately, I was watching CNBC and they are reporting that AIG (AIG) is looking for a bridge loan from the Fed.

CNBC also reports that the Fed forced Merrill (MER) to put itself up for sale.

THIS WHOLE THING IS FINANCIAL SCIENCE FICTION.

• • •

CNBC is reporting (and I do not see it anyplace on the net to which I can link)  that 10 banks and investment banks will contribute to a fund with total capital of $70 billion.

The CNBC anchor thought that this would function as a private discount window of sorts which contributors could access, if need be.

Source: Lehman Files For Bankruptcy