Bailout Fever Stops With Lehman

When there's a bear market, Wall Street investors go hunting for the elusive bottom—the point at which bad times stop and things turn around. Investors sniffing around the flailing Lehman Brothers seem to seeking a bottom, too. This time, they're testing whether the government has the stomach for one more big banking bailout.

The likely answer: No way. That's because Lehman's collapse seems much more contained than other bank meltdowns that threatened consumers directly. The Federal Reserve ponied up $29 billion this spring to help salvage a rump Bear Stearns because a run on the bank's arcane mortgage-backed securities could quickly have spread to other banks, paralyzing the housing market. The case for last week's announced rescue of Fannie Mae and Freddie Mac was even stronger: The two firms directly support nearly 75 percent of all mortgages being written today.

Lehman's potential buyers—apparently including Bank of America—would love to see the feds grease a similar exit strategy for the listing bank. One such person leaked his wishes to the Wall Street Journal, saying buyers would "come out of the woodwork" if the government stepped in. Well, wouldn't that be nice: Big investors getting a sweet deal thanks to a wink, or a wad of cash, from Washington.

President Bush and his financier in chief, Treasury Secretary Henry Paulson, must be thinking: Enough, already. The government has already committed well over $400 billion to a consumer stimulus plan and various bailouts. Now seems like a good time to remind the markets that bailouts are for nationwide emergencies, not investor therapy. Factors working against a bailout:

Lack of contagion. The reasons are abstruse, but Lehman's precarious position seems less linked to the overall credit markets than that of Bear Stearns. If the bank were to fail outright, it would probably have little effect on other banks, especially those that deal directly with consumers. One bit of evidence: While Lehman's shares have tanked, financials overall have stayed steady. "Lehman may not be too big to fail," says Charles Payne of research firm Wall Street Strategies.

Political pressure. The Bush administration and the Democratic Congress have generally escaped criticism for the bailouts they've engineered so far, largely because the case for the benefit to taxpayers was pretty clear. That would be much harder with Lehman, one of Wall Street's smaller banks. Besides, Paulson started his Treasury tenure as a hands-off free marketer, not as a bailout magician. He'd welcome a breather.

Merrill may be next. Wall Street is bracing for another ugly downturn at Merrill Lynch, one of the biggest firms on Wall Street, and the concomitant vulture activity by hedge funds and others who could exploit the firm's downward spiral. Merrill is tied into nearly every part of the financial system, and Washington would have to pay close attention. So may the rest of us.