Bank of America to buy Lehman?

This morning, the FT reports that BofA is considering a joint bid for Lehman with JC Flowers & Co. and the Chinese sovereign wealth fund. 

A forced sale of Lehman Brothers at a fire sale price appears to be the most likely option in the wake of the massive drop in Lehman's share price over the last few days, people familiar with the matter add. "The only question now is what price," says one person who has been in discussions with Lehman over possible asset sales as well as with regulators.

While the details of any proposal haven't yet been fully worked out, a bid from the BofA-led group may involve losses for holders of the debt as well as shareholders. That would be a dramatic departure from recent deals where holders of debt were saved even as shareholders suffered heavy losses.

Regulators will most probably remain on the sidelines, monitoring the situation but unwilling to offer any potential buyer the sort of guarantees that JP Morgan received in mid-March when it bought Bear Stearns.

Some thoughts:

• When it comes to the rumor mill, Felix Salmon had some very sage advice:

Today could quite possibly be the most rumorlicious in Wall Street history. Goldman's buying Lehman! No it isn't! The Fed's going to cut rates between meetings! Maybe a private-equity shop can help! Interestingly, Lehman stock has not been particularly volatile today, trading in a band between $4 and $5 all day. (OK, that's volatile on a percentage basis, but not on an absolute basis.) And the credit default swaps, too, seem to be keeping some grip on reality.

The fact is that anything could happen at this point, and the situation is very much up in the air. Lehman, with the help of the Fed, will probably muddle through today and tomorrow; I suspect that it won't exist in its present form come Monday morning. But the range of possible outcomes for shareholders and bondholders is enormous, and anybody playing in Lehman securities right now is a gambler, not an investor.

If you think you know something, you're wrong. Even Dick Fuld doesn't know what's going to happen: hell, he doesn't even know if he's going to have a job come Monday morning. Speculation and rumor can be fun, but they don't really achieve anything. So go back to your day job, safe in the knowledge that the game will have played itself out within a week, tops.

• It is best if this plays out without government intervention.  The capital markets need to convincingly demonstrate that they can handle these kinds of liquidations internally, both to shore up investor confidence, and to mitigate the moral hazard created by the Bear bailout.
• This is the first time we're hearing talk of creditors taking a haircut.  That's a pretty big step for what used to be a rock solid investment bank with a long and storied history.  I'm of two minds on this.  On the one hand, if you've got a liquidity problem, you probably don't want to make people more afraid to lend money.  On the other hand, stockholders were hardly the only ones who made foolish choices during the bubble; I don't even think they were the greater fools.  Wiping them out, while leaving the creditors whole, takes away the just and good lesson that people should now be learning about excessively loose credit standards.  Failure is nature's way of saying:  "Don't do that!"

Update:  Yves Smith has more.