Andrew Sorkin at the NYTimes (via Yves Smith) notes that the NYFed and SEC knew all about Lehman’s dubious accounting over the summer of 2008 and didn’t do anything. He poses two explanations:
Indeed, it now appears that the federal government itself either didn’t appreciate the significance of what it saw (we’ve seen that movie before with regulators waving off tips about Bernard L. Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.
More realistically the regulators knew Lehman was going down, but they also know that the infrastructure of the CDS market couldn’t support the failure of an investment bank until some clearing mechanism was in place. Remember that September 2008 was the date by which the dealer-brokers had committed in March 2008 that most dealers would be live with each other for central settlement submission and confirmation. On July 31, 2008 the dealers confirmed that they were on track for centralized settlement of the CDS market in September. On September 15, Lehman failed.
It’s my impression that no one in the financial industry thinks the CDS market had the infrastructure necessary to survive the collapse of Bear Stearns in March 2008. The regulators spent the summer of 2008 putting that infrastructure in place — and only then let Lehman fail.
Do you think that this timing was purely coincidental?
Synthetic Assets 
I believe that letting the weak players that caused this failure to go into BK would have given them a chance to get a judge to rule the insured hedge funds were illegal contracts because of no insurable interest. That would have let a few banks fail but the people responsable for bad decisions would have failed right along with them.