http://online.wsj.com/…

Lehman Brothers Holdings Inc. came under mounting pressure Tuesday after hopes faded for an investment deal with a Korean bank, helping to trigger a 45% fall in the firm’s shares.

Lehman’s troubles mark the latest installment in the worst financial-system crunch in decades, coming just two days after the U.S. government announced its plan to take over the two giants of the mortgage business. U.S. stocks fell Tuesday, giving back gains that had greeted the weekend bailout of Fannie Mae and Freddie Mac.

The drop in Lehman shares highlights the continuing nervousness in markets as the company attempts to raise fresh capital to offset sharp declines in the value of its assets. Shares of Lehman, which is heavily exposed to troubled real-estate investments, have been under pressure for months and were down about 80% this year before Tuesday’s drop. Investors have been frustrated as Lehman has taken months to pull together a plan to raise capital to absorb expected losses.

On Tuesday, credit-rating services Standard & Poor’s and Fitch Ratings placed their ratings on Lehman on review for downgrades. S&P cited uncertainty about the firm’s ability to raise capital, “based on the precipitous decline in its share price in previous days.” If downgraded, Lehman may be required to post billions of dollars in collateral to its trading partners on derivative contracts and other agreements.

Oh and don’t forget Merrill Lynch’s and Wachovia’s problems. Fun times. Domestic stocks down, international stocks down, precious metals down… a lot. Wouldn’t mind so much if we also had price deflation for the rest of the commodity markets.

http://www.bloomberg.com/…

The cost of protecting against losses on Treasuries rose to the highest in almost four months on speculation any financial support for mortgage lenders Fannie Mae and Freddie Mac may cost the U.S. government its AAA rating.

Credit-default swaps on Treasuries increased 4 basis points to 18, according to CMA Datavision prices at 2:30 p.m. in London. The 10-year contracts are near the record 19 basis points when the Federal Reserve backed the bailout of New York- based brokerage Bear Stearns Cos. on March 17.

Senior Bush administration officials are considering a government takeover of one or both mortgage lenders, according to a person familiar with the discussions. Fannie Mae and Freddie Mac have about $5.2 trillion in debt outstanding, exceeding the Treasury’s $4.6 trillion in notes. Standard & Poor’s said in April that possible support of government- sponsored lenders posed a threat to the government’s top rating.

“The ratings agencies said the risk for the U.S., if it bails out Fannie and Freddie, is it could lose its AAA rating,” said Andrea Cicione, a London-based credit strategist at BNP Paribas SA. “It is clearly a possibility, albeit a remote one.”

Investor speculation the government will provide support helped drive down the cost of default protection on the mortgage companies’ senior debt. Credit-default swaps on Fannie Mae dropped 17 basis points to 62 and contracts on Freddie Mac fell 23.5 to 55, according to CMA.

Treasuries fell the most in three weeks, increasing the yield on the benchmark two-year note by 8 basis points to 2.49 percent, according to bond broker BGCantor Market Data.

Shares in Washington-based Fannie Mae and Arlington, Virginia-based Freddie Mac tumbled for a third day on concern the firms don’t have enough capital to offset writedowns. Their failure would deepen a housing slump that already is the worst since the Great Depression.

The companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, may be able to count on a federal lifeline because they are too big for the government to allow them to fail, leading Republican and Democratic lawmakers said.

This is what government intervention gets you. Sit back and enjoy it. You’re paying for it.