The pace of entropy is quickening as the financials are sputtering out post-Big Big Bailout.  Things fall apart; the center cannot hold.  More and more banks are falling past the point of no return, for the Big Big Bailout has all but shattered confidence in the markets.  They know this was the all-or-nothing step.  If this doesn’t work…

Lehman Brothers may not make it through the weekend.

Lehman Brothers Holdings Inc. entered into talks with potential buyers of the securities firm after Moody’s Investors Service said the company must find a “stronger financial partner” and the shares plummeted.

Bankers from other firms are reviewing Lehman’s books today, people with knowledge of the situation said, declining to identify the potential acquirers. Mark Lane, a spokesman for Lehman, declined to comment.

Without a “strategic arrangement” in the “near term,” Lehman’s credit-ratings may be downgraded, Moody’s said yesterday after the New York-based investment bank announced the biggest loss in its 158-year history. Lehman, led by Chief Executive Officer Richard Fuld, fell as much as 46 percent in New York trading today, ceding its spot as the fourth-biggest U.S. securities firm by market value to Raymond James Financial Inc. in St. Petersburg, Florida.

“While the number of potential acquirers at this point is very few, Moody’s action certainly raises the specter of takeout, potentially at a very low price,” said Merrill Lynch & Co. analyst Guy Moszkowski in a report today. He lowered his recommendation on the stock to “no opinion,” saying a potential “take-under” makes it hard to gauge a price target.

Ahh, but if only Lehman was in trouble…
A number of financial players are nearing the event horizon point, the point where they are falling too close to the black hole of debt to escape it.  Lehman is there and will not survive.  Washington Mutual may be the next company to follow Lehman down the tubes.

Federal banking regulators, who earlier this week ratcheted up their scrutiny of Washington Mutual, are closely watching the thrift’s condition.

“We’re aware of it and we’re monitoring it,” said William Ruberry, a spokesman for the Office of Thrift Supervision, the Treasury Department agency that is WaMu’s primary regulator.

With losses in its mortgage portfolio expected to peak at $19 billion, the Seattle-based bank could be Wall Street’s next casualty, some analysts believe.

“The question becomes can it survive if it has billions and billions of dollars left to write down on those loans?” Ladenburg Thalmann analyst Richard Bove said. “What’s going to keep it in business, what is going to keep it alive?”

“WaMu made mistakes in loan originations, to be sure, but it also had bad luck in that the bulk of its loans are in California,” which has suffered some of the steepest declines in home prices and largest number of foreclosures, said Stuart Feldstein, president of SMR Research, which provides research on the lending industry.

He notes that WaMu expanded its business in the late 1990s by buying two of the largest thrifts in California, Home Savings of America and its rival Great Western Bank, “in a mad acquisition spree by ex-CEO (Kerry) Killinger.”

“It was an opportunity for him to grow quickly, but in retrospect — and hindsight is easy — they should have had a little more geographic dispersion,” Feldstein said. “He had to sit back and cross his fingers that nothing ever went bad in California.”

One thing working in WaMu’s favor is its valuable deposit base. Bove suspects management is “scrambling to find a buyer.”

One indicator that the bank could be in trouble is the widening of its credit spreads, evidence that investors believe the debt is riskier.

Washington Mutual’s spreads are greatly wider than Lehman’s — and Lehman’s spreads are already wider than those of Bear Stearns Cos. shortly before its demise in March, according to Len Blum, managing director at investment bank Westwood Capital.

It’s entirely possible neither one of these companies will make it through the weekend.  The Fed has set a dangerous precedent:  having rescued Bear Stearns, it now has an obligation to rescue these larger banks from a similar fate.

Worse credit spreads than Bear Stearns when it went under, keep that in mind.  The Street knows what is coming.

The problem is even the Fed had to use a proxy buyer company, in Bear Stearns case it was JP Morgan Chase.  NOBODY is looking to buy either one of these companies right now.  Even foreign sovereign funds with hundreds of billions aren’t touching either of these companies.

Mainly because foreign investors would want a seat on the board and controlling interest.  These companies have been run very badly, and the only way foreign money is going in is if they get to replace CEOs.  The US won’t let that happen in an election year, or any year for that matter.

But the alternative is making us pay for it…and we’ll just borrow the money from the Chinese like we’ve been doing.

Meanwhile, in the near future, insurance giant AIG is probably third in line.

American International Group Inc., the world’s largest insurer, holds between $550 million and $600 million in Fannie Mae and Freddie Mac preferred shares, according to a source familiar with the investment.

Investors have been biting their nails over companies’ holdings of the agencies’ preferred shares, with concern that the recent government takeover of the giant home-funding companies could wipe out value.

So many major financial firms have Freddie and Fannie holdings.  Now the value of all those holdings, and thus, all those financial institutions, are in question.

As the article says, AIG is the world’s largest insurance company.  If it goes down, more dominoes will fall.  Fannie and Freddie are being run by the same inept people that created the mess, folks.  Every bank in the world owns some Fannie and Freddie debt.  That value is falling on an hourly basis around the world.  The insurance industry as a whole owns $4 billion of it, and it’s rapidly disintegrating.

The press wants you to believe this is the beginning of the end of the credit crisis.

I’m here to tell you this is just the end of the beginning.  Now we’re going to most likely see a number of major financial players go under, and go under in rapid succession.

It’s only going to get worse from here, folks.

Be prepared.

Cross-posted at ZVTS.