In the wake of the collapse and bankruptcy of Lehman Br Holdings (OTC: LEHMQ), chairman and CEO Dick Fuld and his wife Kathy have begun selling off their prized collection of modern art.

The couple has been consigning parts of their collection to Christie's, the renowned auction house. 16 post-war drawings have been consigned with a pre-sale estimate of $15-$20 million. At its peak, Fuld's stake in Lehman was worth just under $1 billion, but those shares are now virtually worthless.

What does all this have to do with Lehman, the proposed bailout of the banking industry, and the economy? Nothing really. But at least it's now clear that the insiders will be suffering alongside taxpayers and foreclosed homeowners: Fuld has to part with $15 million worth of post-war drawings!

Who's going to buy that art, you ask? Perhaps hedge fund manager David Einhorn, who was one of the few people calling Lehman's bluff a few months ago, will drop a few bucks to redecorate his office.

BusinessWeek offers an excellent critique of Treasury Secretary Henry Paulson's $700 billion plan to conduct a reverse auction of $13 trillion in financial toxic waste. But more importantly, it proposes a solution that could be just what we need to solve the problem -- recapitalizing the strongest banks and letting the weakest merge or fail. As I posted, such a strategy would not only solve the real problem -- a lack of capital -- but it would give taxpayers an equity stake in those banks. And that stake might be sold at a profit in a future economic recovery, helping us recoup our investment in this plan.

What exactly is the problem? Too much financial toxic waste and not enough capital to back it up. More specifically, financial institutions (FIs) holding the $13 trillion in mortgage-backed securities (MBS) and collateralized debt obligations (CDSs) only have about $340 billion in capital. So a 2.6% decline in the value of that toxic waste wipes out their capital. To estimate how much capital it would cost these FIs to write that down, I will assume that have already partially written it down -- to 60 cents on the dollar -- or $7.8 trillion. If its market value is even lower, say 20 cents, they would need to take a $3.1 trillion write-down to mark it to market -- leaving FIs with a capital deficit of $2.8 trillion ($3.1 trillion minus $340 billion).

Paulson's plan is deeply flawed since the reverse auctions -- which reward the FI willing to sell its toxic waste for the lowest price -- will either add misery to FIs or taxpayers. The FIs that sell toxic waste that's on their books at 60 cents on the dollar for, say, 20 cents on the dollar will be required to take a 40 cent loss. This will deplete their capital as I illustrated above and they will not be able to raise more.

How many billions are Paulson and Bernanke asking for? Seven hundred billion dollars. Now that's real money! And the administration is touting this new program as if they knew what they were talking about.

We have heard folks wondering how and why Treasury Secretary Paulson should be given the power and discretion to do as he sees fit with this bailout money.

We have heard people speaking about the pain and the injustice, along with the doubts and reservations about the concept of giving away so much money.

Actually giving this handout to companies that have demonstrated such corrupt thinking and irresponsibility (see SEC opens the gates and the world drowns) is a supreme injustice given that their decisions led to the collapse of once-mighty financial industry titans. See Lehman Bros 158-year sad ending for just one example.

Has anyone asked how the Treasury came up with that number? Can someone explain the difference between $700 billion and a blank check?

Let's be polite. It looks like John "Straight Talk Express" McCain may have misspoken when he said that his campaign manager did not receive money from Freddie Mac (NYSE: FRE). McCain said in a CNBC interview on September 21 that his campaign manager, Rick Davis, "has had nothing to do with [Freddie and Fannie Mae (NYSE: FNM)] since [2005], and I'll be glad to have his record examined by anybody who wants to look at it," according to the New York Times. He was either kidding, having a senior moment, or worse. It turns out that Freddie paid Davis "$15,000 a month from the end of 2005 through [August 2008]," according to the Times.

Although Davis did not do much for the money -- besides retain his ties to McCain -- his firm, David Manafort, got $500,000 from Freddie and $2 million between 2000 and 2005 as president of "the Homeownership Alliance, which [Freddie and Fannie] created to help them oppose new regulations," according to the Times. It's too bad because more regulation might have prevented the need to spend $200 billion worth of our money to bail out Fannie and Freddie bondholders like PIMCO's Bill Gross and China's People's Bank.

Sure, McCain has been trying to change the subject -- by creating, what I consider to be, false advertisements that accuse a former Fannie CEO of advising Obama. (This former CEO and the Obama campaign both deny the ad's claim, according to the Times). And while McCain's "verbal missteps" may disturb some, his pattern of working closely with those who deregulated the financial services industry links him to what put our economy in the tank. After all, his chief economic advisor, Phil "Americans are Whiners" Gramm, deregulated the Credit Default Swap (CDS) market that helped bring down Lehman Brothers and American International Group (NYSE: AIG).

The FBI wants to know if there was any fraud in the actions that caused the collapses of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), AIG (NYSE: AIG), and Lehman. The agency may want to save its time. The probable cause of all the trouble was much more likely to have been stupidity.

According to The Wall Street Journal, :Pressure is building for the FBI and regulators to hold top executives accountable for the crisis that has crippled the nation's finance sector."

The FBI is not likely to find criminal behavior. It is likely to find that executives at big financial companies did not understand the most complex financial instruments that they were buying. They did not understand the risk of the value of those instruments dropping if subprime mortgages began to default at historically high levels. These executives pushed to be paid well when the instruments were making money but have not had huge pay cuts now that the results from the investments are causing huge losses. It is none of the FBI's business that CEOs being kicked out of these operations are getting big pay packages.

One of the reasons that there was unlikely to be wrong-doing is that CPAs spend tremendous amounts of time going over the books of large banks and brokerages so that their audit firms are not liable for allowing fraud to make it into financial statements. They learned that lesson from Enron. Fannie and Freddie's books are subject to government scrutiny, which make fraud even less likely.

Looking for criminal actions at the company's is waste of FBI time. The agency probably needs the investigations to look good. They would not want to be accused of being caught sleeping.

Douglas A. McIntyre is an editor at 247wallst.com.

The Lehman Brothers opened for business in 1850, even before the civil war (1861–65). Now, after 158 years, the illustrious financial powerhouse is gone and the founders must be turning in their graves.

You could be sure that the careful and methodical practices of the founders were lost by its current management team that strayed from sound business practices when they indulged in risky lending adventures and extremely high leverage.

From the company's web site:

The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers.

Cotton was the cash crop of the time, and the Lehmans accepted it from the local farmers as currency to settle accounts. The brothers traded the cotton for cash or merchandise, becoming brokers for buyers and sellers of the crop. In 1858, they opened an office in New York, which was the commodity trading center of the country.

Almost two months have passed since I posted Serious Money: Tempting fate with 10 financials - the results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak, or so I thought. Now things are even worse, much worse, and a new market bottom was reached only last week.

Trying to predict where this market will go is not possible, but there are many ways to play it. I chose to buy into a pool of financial stocks, believing the survivors would post gains that would overshadow the losers.

When I last updated this story, the pool of stocks was up 26%. Things have gotten worse, but the group is still up 13.89% plus the dividends. This is better than any of the indices, although it is much more speculative.

There was plenty of big news since the last report. While Lehman Brothers Holdings (OTC: LEHMQ) went bankrupt, MBIA Inc (NYSE: MBI) made up for it by more than doubling. Meanwhile, Merrill Lynch (NYSE: MER) is in survival mode supported by a Bank of America (NYSE: BAC) buyout offer. Seven stocks are up, two are down and one is gone (returns from July 29 prices):

Late Sunday night it was reported by the Associated Press that the Federal Reserve announced it had approved the request of the two investment banks, Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS), to become commercial banks and to take deposits, bolstering the resources of both institutions.

Since Bear Stearns was acquired in a fire sale by J P.Morgan Chase (NYSE: JPM) in March both firms have been under increased pressure to show their financial strength, but the bankruptcy of Lehman Brothers Holdings (NYSE: LEH) and the buyout of Merrill Lynch (NYSE: MER) by Bank of America (NYSE: BAC) last weekend have changed the playing field too much.

So what does this mean in short? It means the investment banks wanted the comfort and security of mama bear. They wanted the protection of the Federal Reserve, along with the ability to borrow from it at the discount window, and in a worst case scenario, to be bailed out like everyone else.

The Fed, from its perspective, knows this to be true and understands that if the investment banks -- now commercial banks -- can increase their reserves, then maybe a bailout will not be required, which is better for everyone. Along with this change will come additional requirements and regulation.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: I owned BSC and now own shares in its acquirer JPM.

Lehman Brothers CEO Dick Fuld has been in seclusion since the company's bankruptcy filing last week, but get out your popcorn and soda: he's set to be in Washington this week to testify before the House Committee on Oversight and Government Reform. Fortune's Patricia Sellers reports that "Fuld is supposed to explain what led to Lehman's collapse and explore the impact on financial markets and the U.S. economy."

For those of you who are playing along at home, there are essentially two possibilities for what Mr. Fuld will offer as an explanation:

• "I screwed up. We borrowed too much money to make bad investments that we didn't understand, and when the crap start to hit the fan, I was dumb enough to buy back stock instead of raising cash. Can you believe that? I take full responsibility for this mess and, no, I'm not giving back my money."
• "My company was destroyed by mean nasty short-sellers who spread mean nasty rumors about the company, and then drove down the stock through naked short-selling. If the SEC would have reined in market speculators and manipulators, we would still be alive and I'd still have that cushy leather desk chair."

I'm going to go out on a limb and suggest that Fuld's explanation will be mainly the latter. But take it with a grain of salt: when former Enron CEO Jeff Skilling was hauled before Congress to explain that company's collapse, he said that "It is my belief that Enron's failure was due to a classic run on the bank, a liquidity crisis spurred by a lack of confidence in the company."

But the reality is that Enron and Lehman filed for bankruptcy protection because they didn't have enough assets to cover their liabilities. Period. And it's wrong to blame that on the few short-sellers who were prescient enough to see through optimistic and misleading "forward-looking statements."

I've put together a good-sized Enron memorabilia collection, inspired by the affordability. I was able to buy an Enron lunch bag on eBay for less than the cost of a similar nonbranded product at Wal-Mart.

The collapses of Lehman Bros. and Bear Stearns aren't anywhere near as interesting but the headlines have attracted a swarm of eBay listings. According to The New York Times, "When a big Wall Street firm goes belly up, one bet you can take to the bank is that memorabilia will be offered for auction on eBay within hours. "

If you're looking to support a charity instead of an opportunist -- or burned employee who, having lost his 401(k) grabbed a stack of mugs on his way out the door -- one seller sold a piece of toast with the initials "BS" and "LB" branded on each side. Proceeds benefit the Children's Diabetes Foundation in Denver. The price? A mere $15.50. A piece of toast that offers the ticker symbols of companies about to collapse would likely be worth far more.

As an investment, I don't think Lehman and Bear memorabilia are compelling: collectibles from the Enron and Worldcom blowups do not appear to have appreciated in value.

Historians are likely to look back on this week as one of the most significant in American economic history. This was the week that the government let Lehman Brothers Holdings Inc. (NYSE: LEH) fail -- a record $639 billion bankruptcy, lent $85 billion to keep American International Group (NYSE: AIG) from collapsing, and pumped $300 billion into global financial markets to keep them from seizing up. But that turned out not to be enough to keep the markets afloat -- for that Hank Paulson needed the ultimate bailout.

While I don't remember much of the American History I studied in high school, one thing sticks with me today. It always seems that it takes a major crisis to get America to make big changes. It is never possible for leaders to foresee problems and take action to avert them before they turn catastrophic. The averting catastrophe approach always struck me as far smarter than the crisis approach. However, it seems that lawmakers need tangible evidence of prior bad outcomes to make the case that the status quo is deeply flawed and must change.

While he had already loosened up $800 billion in taxpayer money by Wednesday, Paulson needed an even scarier story to get Washington to agree to an additional $500 billion to create an agency to buy illiquid assets from financial institutions. What exactly did he tell Congress and the president to scare them into agreeing to this plan? AP suggests that he described evidence of the global financial market ceasing to function and painted a frightening picture of the economic and political chaos that would ensue if that functioning ceased for an extended period of time.

Financial stocks, which have been bloodied over the past few weeks, rallied today on the plan announced by Treasury Secretary Henry Paulson for the government to acquire troubled bank assets. The recently announced ban on short-selling helped the shares as well.

Goldman Sachs Group Inc. (NYSE: GS), down 40 percent for the year, rose $20 to $128 in mid-morning trading. That's about an 18 percent rise and comes a day after the stock hit a 52-week low. Remember, Goldman recently reported a 70 percent decline in third quarter profits which given the billions of write-offs taken by its competitors is almost miraculous. Maybe Paulson decided the government needed to suck away the bad investments from their balance sheets when he saw pressure building on his old firm.

Today's 25 percent raise in Morgan Stanley (NYSE: MS) may alleviate some of the pressure on the investment bank to find a merger partner to avoid the same fate as Lehman Brothers Holdings Inc. and Merrill Lynch & Co. (NYSE: MER). Shares in the New York-based company rose $5.28 to $27.83. Morgan Stanley reportedly is mulling a tie-up with Wachovia Corp. (NYSE: WB).

Even Washington Mutual Inc. (NYSE: WM), another company that might get a multi-billion buyout, got a boost, soaring 81 cents to $3.80. That's an increase of more than 27 percent. Of course, the 52-week high is $39.25, so any celebration is muted.

The joy from shareholders about the Paulson buyouts is palpable. Taxpayers are more sanguine. The one thing I remember from Economics 101 -- where my professor used to always use marijuana joints in his lectures about supply and demand -- is that every transaction needs a buyer and seller. What makes the government think it will be any more successful in unloading the toxic paper than the private sector? I just don't see who is going to buy the stuff until there is a major turnaround in the housing market which may not happen for years. Even then, turning a profit will be a challenge.

U.S. stock futures were much higher Friday, indicating stocks could have a sharply higher start following Thursday's late-session rally. Investors are encouraged by a possible government plan to buy up bad assets from financials. The Securities and Exchange Commission also temporarily banned on short selling on 799 financial institutions. The U.K. has taken a similar action. In response, stocks world wide surged.

Financial stocks indeed rose in pre-market trade. Goldman Sachs (NYSE: GS) is up over 21%, Wachovia (NYSE: WB) up over 24%, Washington Mutual (NYSE: WM) up over 35%, Citigroup (NYSE: C) up over 17%, Bank of America (NYSE: BAC) up over 18% and JP Morgan Chase (NYSE: JPM) up about 9% to name a few.

Morgan Stanley (NYSE: MS), which is also rallying nearly 25% in pre-market trade, is apparentlyI in talks with China Investment Corp. on selling a stake of up to 49% to , as opposed to merging with Wachovia, the Financial Times reported.

Oracle Corp. (NASDAQ: ORCL), reported better-than-expected quarterly results and raised its outlook. The stock is up 6% in pre-market trading.

Palm Inc. (NASDAQ: PALM) shares, however, are down 9% in pre-market trading after initially reacting positively to the quarterly results Thursday in after-hours trade. The smartphone maker reported overall better-than-expected quarterly results even as its net loss widened.

In one of my recent rants I blamed the Bush administration for some of what ails us (The George W. Bush economic plan?) and now an Ex-SEC Official Blames Agency for Blow-up of Broker-Dealers, as reported by Julie Satow, staff reporter of the New York Sun, September 18, 2008.

In my post I simply tried to make the point that government policy and leadership does affect how laws are written, rules are enforced, and the sentiments of leadership affects things even when those leaders are not holding the smoking gun. I am not giving the legislature a free pass on this either, but policy is set by the President.

During the current administration, policies that were put in place in 1975 to prevent the kinds of transgressions we are witnessing now by financial institutions were shredded by the current SEC management.

Allegations are being made by a former SEC official, Lee Pickard, who says a rule change in 2004 are what led to the failure of Lehman Brothers (NYSE: LEH, not trading) , Bear Stearns (NYSE: BSC, not trading), and Merrill Lynch (NYSE: MER).

Now we learn that rules put in place regarding capital reserves, leverage limits, and basic accounting principals were removed, eased, and modified as reported: "allowing the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount."

As an example, up until 2004 the net capital rule required that broker dealers limit their debt-to-net capital ratio to 12-to-1. To make matters worse the SEC is not admitting the ERROR of THEIR WAYS, but are making excuses for the failings and considering even further liberalization of the rules governing lenders and investment houses.

It is an ironic twist and one that has many conservatives in an uproar that the current administration has been so liberal with fiscal policy and fiscal restraint that Federal spending has grown out of control and the controllers have turned a blind eye to their responsibility.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: I owned BSC and now own shares in its acquirer JPM.