paheka, why would a investment bank like Lehman pick up another bankrupt firm's liability unless it was part of a restructuring? If it was part of a restructuring, I would think that the primary debt holders, those that held some sort of collateral, would be paid first and there may be no remaining equity to make good on the borrowed shares that had been short sold.
I'm thinking that this is one of the issues that is most worrisome about the potential unwinding of the financial markets. I also was wondering if it is a small factor in the high level of shorting that has been going on. For example, if a firm was sort of strapped, they may delay covering short positions as one of the many moves to keep themselves financially liquid. Likewise, as crazy as it might seem, perhaps a firm might also, as one of many money generating moves, look for what could be good short candidates and go a little heavier than normal on the short side. Each of these scenarios, whether possible or not, would increase the risk to the strength of the company whose shares were sold short.
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