Lehman: Is Bankruptcy an Option?

Henry Blodget says that Lehman declaring bankruptcy would be a "sensible solution" to its current predicament:

A bankruptcy filing would put the company in the hands of a court appointed liquidator, which would take years to sell off everything. This would wipe out Lehman's equity and hit its debt, but the liquidation sale would happen in an "orderly" fashion. It might take so long, in fact, that some of the assets might start appreciating in value before the end of the process.

This was most emphatically not received opinion when Bear Stearns collapsed. Broker-dealers have to file for Chapter 7 bankruptcy, not Chapter 11, so Blodget's right that there would be a liquidation rather than any attempt to operate Lehman as a going concern. But could a drawn-out Chapter 7 liquidation resemble, in some ways, a more conventional wind-down under Chapter 11?

Alea doesn't think so. In a comment here back in April, on the subject of Bear Stearns, he wrote:

It doesn't matter if they could have filed under chap 7 or 11. In both cases, derivatives are exempt and counterparties would have liquidited positions and collateral immediately. The filing was a non-starter just as it was for LTCM and for the same reasons.

I'm inclined to agree: while Lehman's mortgage book might get sold off slowly, its much larger trading book, including its derivatives operations, would have to be liquidated very quickly -- or transferred to some other institution. If the book wasn't taken on by say Goldman Sachs, such an enormous forced unwind would almost certainly cause collateral damage outside the holders of Lehman's securities; depending on how it played out, it might even threaten the viability of Merrill Lynch and AIG.

Right now, with time running out, there seems to be a multi-billion-dollar game of chicken going down at the New York Fed. Potential Lehman saviors (Bank of America, Barclays) are demanding government sweeteners before they step in to save the day; Paulson and the Fed are adamant that's not going to happen. Do they have a Plan B which would prevent a bankruptcy filing from causing devastating systemic contagion? There's a good chance we'll find out tomorrow.

Update: Michael de la Merced says that Lehman could after all file for Chapter 11, and sketches out a scenario under which "major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months". Seems like a high-wire act to me.