Lehman, S&P & Moody's Gaming ("testing") the Fed...

My only thought other than 'disgust' is that LEH is such a financial train-wreck they need to do everything they can, despite how desperate it is and looks, to stay alive. Isn't this type of financial engineering what got them all in trouble in the first place? Got to hand it to them though, if the Street won't buy your trash, make it look slightly different and pawn it off on the Fed. -Best, Mr Mortgage

NEW YORK (Reuters) - Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) repackaged unsold debt and used the Federal Reserve's new borrowing facility to convert loans that investors mostly rejected into cash to finance its business, the Wall Street Journal reported.

According to the Journal, Lehman transferred $2.8 billion in loans that included some risky leveraged buyout debt into a new investment entity called Freedom.

Freedom then issued debt securities backed by the loans, and $2.26 billion of the securities got investment-grade credit rankings from Moody's and Standard & Poor's, according to the report.

The bank used some of those securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, the Journal said, citing people familiar with the matter.

The move was meant as a test to see what the Federal Reserve would accept, and the size of the loan was not material, the Journal added, citing a person familiar with the matter.

Lehman representatives and the Federal Reserve could not be reached immediately for comment.

(Reporting by Aarthi Sivaraman; Editing by Erica Billingham)