Inside the centre of the storm. “Keep hanging in there” was the mantra, oft-repeated, that echoed loudest on Lehman Brothers’ cavernous trading floors on Monday afternoon, where a rush of résumé-writing signaled the melancholy mood of a dying firm.

There were no tears, but rather the sad-eyed smiles of gallows humor. The bankers’ dress code was out: A few hold-outs kept their ties on, but most of the traders moved around in jeans, casual shirts, even sneakers. One young employee showed up in a green Lehman T-shirt. Many employees toyed with their résumés in full view of colleagues. Others perused job-listing Web sites — Wharton’s alumni page was popular — and compared notes about headhunters.

“What have you heard?” was a common question, mostly met with shrugs and silence. No one seemed to know their specific fate. No staff meetings had been announced, and cries went up whenever media outlets posted a new tidbit about the firm’s liquidation. — Deal Book, New York Times

Nightmare on Wall Street. EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt…

With these developments the crisis is entering a new and extremely dangerous phase. If Lehman’s assets are dumped in a liquidation, prices of like assets on other firms’ books will also have to be marked down, eroding their capital bases. The government’s refusal to help with a bail-out of Lehman will strip many firms of the benefit of being thought too big to fail, raising their borrowing costs. Lehman’s demise highlights the industry’s inability, or unwillingness, to rescue the sick, even when the consequences of inaction are potentially dire. — The Economist

Lehman should have been saved. Occasionally in sports-say, with the New York Knicks’ hapless former coach Isiah Thomas—a media and fan frenzy gets whipped up to the point at which a player or a coach simply has to be abandoned. No matter how many years he’s been with the team or how much future potential he has, ejection becomes inevitable under what amounts to a kind of blood lust.

Something similar seems to have happened with Lehman Bros. Holding Inc. (LEH) Toward the end of last week, when both Barclays and Bank of America were walking away as possible buyers, everyone seemed to turn against Lehman — at least, against the idea of the government helping the company survive.

“Just say no” to a bailout, argued Jesse Eisinger on, insisting that the “market needs a firm lesson.” Capitalism means that investors have to know they can fail, argued Tom Petruno in the Los Angeles Times. — The Big Money, from Slate

Lehman shockwaves reach the UK. Lehman Brothers’ travails sent shockwaves through Britain’s banking sector on Monday as investors braced for the possibility of further bank collapses.

Barclays and Royal Bank of Scotland, two of the UK’s biggest banks, fell by 10 per cent. The worst-hit stock was HBOS, the UK’s fifth-largest bank, which at one point saw its shares plummet by 36 per cent before recovering to close 17.5 per cent down at 232.5p.

One concern was the scale of banks’ direct exposure to Lehman. The Financial Services Authority, the regulator, is thought to have scrutinised the situation and concluded the exposures were “manageable”. On Monday, some banks disclosed their position – notably Lloyds TSB, whose exposure stands at less than $75m (£42m).

A much bigger concern is what happens if Lehman is forced to sell some of its complex assets — rooted in US subprime assets — at rock-bottom prices. This would force down the market price and cause UK banks to mark down the value of similar assets, triggering further writedowns and potential losses. — Financial Times

Wall Street’s new realities. My anonymous colleagues here at have a couple of questions:

With Bank of America’s $44 billion acquisition of Merrill Lynch, only two independent Wall Street firms remain: Goldman Sachs and Morgan Stanley. Will they now feel pressure to merge with a big commercial bank? …

With the deal, Bank of America leaps over Citigroup to become a behemoth in every niche of finance, from credit cards to derivatives. Is the financial supermarket back?

The simple answers are yes and yes. But.

The first thing to note is that although there is undoubtedly pressure on Goldman and Morgan Stanley to be acquired by someone much larger, the chances are that they will resist that pressure. Megan Barnett has a good overview of the pressures facing the two last banks standing, not least the fact that their public-company status means constant pressure from shareholders to grow profits — which, naturally, means taking more risk. — Seeking Alpha

Is this the death knell for derivatives? If this is the death of Wall Street as we know it, the tombstone will read: killed by complexity. Derivatives in their baffling modern forms — collateralised debt obligations, credit default swaps and so on – lie at the heart of the failure of Lehman, Bear Stearns, Fannie and Freddie, and even our own Northern Rock.

The philosophy that underpins the growth of derivatives is the idea that risk can be transferred to institutions more able to take the strain. In theory, it’s a terrific scheme — the weak can get rid of risks they can’t handle, and the financial system should be stronger as a result.

The practice is very different, as Warren Buffett worked out years ago. His 2002 letter to his Berkshire Hathaway shareholders made headlines by condemning derivatives as “financial weapons of mass destruction”. The passage comprised only a couple of pages of the lengthy letter but read it again today – it is the best guide to understanding how Wall Street has arrived at today’s mess. — Nils Pratley, Guardian