Paulson to I-Banks: Do you really want to do this?

The NYT is reporting that Treasury Secretary Paulson and SEC chief Cox have effectively issued an ultimatum to the NY investment banks: Fix Lehman or we will unwind it.

Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.

Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.

Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next.

An unwinding of Lehman would be catastrophic to many balance sheets throughout the financials industry. It would provide a real-time market quote for many hard-to-value securities. (Currently, many companies are using fictional valuations for these securities, claiming that there is no actual market transaction to use as a reference, so we'll just make something up.)

The real problem: The Goldman's and Morgan's of the world are already short of cash to solve problems like these. So even if they save Lehman, AIG and Merrill are right behind. And since John Thain's statements are catching up with him, it will take more than pretty words to fix companies like Merrill.

Strap in, it's going to be a wild ride on Monday.

UPDATE: The WSJ is reporting that a deal could be announced tonight. Presumably, somebody set an artificial deadline of tonight so that everyone could play a game of brinkmanship and wait until Sunday to come back to the table.

They have also confirmed that it is up to the NY iBanks to prevent a default:

At an emergency meeting Friday night called by the Federal Reserve Bank of New York, New York Fed President Timothy Geithner, described two potential scenarios: either a liquidation of Lehman or an industry-driven solution in which Wall Street firms would possibly providing financing to remove some of Lehman's real estate assets, one person briefed on the matter said.