http://www.bloomberg.com/…

Morgan Stanley and Goldman have defended their business model, saying they have adequate capital and don’t need the deposit funding that banks have. Mack, 63, lambasted short sellers for pushing his firm’s shares lower.

In a memo to employees yesterday, Mack said the management committee is “taking every step possible to stop this irresponsible action in the market” and urged employees to contact clients to reassure them that the firm is performing strongly and has plenty of capital.

“There is no rational basis for the movements in our stock or credit-default spreads,” Mack wrote in the memo. “We’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.”

Things are bad and people don’t want to lose their investments. That is rational behavior. As for the short sellers… also rational. They expect prices to drop and wish to take advantage of that. It bugs me when individuals use the word rational in this way. Which is really “I don’t understand what’s going on or wish to excuse or diminish the action by claiming no one understands.” By definition those actions are rational.

The rumors surely are abundant. Who’s merging with who? Who’s got Morgan Stanley? Is it Wachovia? Citic Group? HSBC? Wells Fargo? JPMorgan Chase? Seems like people are just throwing out names. “What banks still exist? Yeah that one will buy them!” I’m guessing the reason Goldman isn’t getting this kind of attention is because they are a larger firm.

According to their press release MS has $170+ billion liquid. Some, months ago, was criticizing MS for having that much on hand as it would hurt their earnings just sitting around. They had a good quarter considering the environment. Goldman did relatively worse but still is in an decent position overall. It seems to me there is some game going on. As if there are forces trying to make these firms merge with a bank. Both firms’ credit default swaps are at 10ish levels below what Moody has rated them for which would put them at junk levels and their stocks plummeted on what looks to me to be nothing but positive news.

Unless GS and MS are lying about their liquid assets and the market knows something I don’t… I can’t help but feel like something bigger is going on. Perhaps it’s is just fear and shorters, people selling off to invest into safer things (gold stocks were up 7-12% yesterday) and those furthering the issue by taking advantage of it. With language like this I’m concerned the industry will become even that much more regulated and the world will be thrust further into financial crisis.

http://www.reuters.com/…

A meeting between top government officials and the heads of some of Wall Street’s biggest financial firms over the fate of Lehman Brothers broke up on Saturday but was set to resume on Sunday, a spokesman for the New York Federal Reserve Bank said.

“Senior representatives of major financial institutions reconvened on Saturday with U.S. officials at the New York Fed. Discussions are expected to continue tomorrow,” the spokesman said. Small groups were continuing to work into the night on unspecified issues that were raised at the meeting.

Efforts are under way among Lehman executives, potential buyers and government officials to craft a buyout plan for beleaguered Lehman, possibly before the weekend is over.

Lehman has become the latest victim of the global credit crunch but Treasury and the Fed have made clear they do not want to see taxpayer funds committed to any deal involving Lehman.

Among government officials at the meetings were New York Fed President Timothy Geithner, U.S. Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

I wasn’t able to pay attention to the market the 11th and 12th as a result of attending the Service Nation Summit so I missed the Lehman Brothers and Merrill Lynch stock plunge. (Morgan Stanley didn’t do well, Fannie and Freddie dropped quite a bit too.) The Fed claims that they won’t step in with credit because Lehman has been doing poorly for some time and have access to the discount window. Seems last reported was that Lehman was perhaps to be broken up in three ways with “Bank of America would acquire the bulk of Lehman Brothers, including its mortgage assets. Barclays, Britain’s third-biggest bank, would take a smaller parcel including Lehman’s asset management and fixed income businesses, while Goldman would take the rest.” However other sources are claiming Barclays has backed out citing it “couldn’t get guarantees from the government or agree on a private-sector deal to mitigate what it called Lehman’s “open-ended” trading obligations.”

It’s going to be interesting to see what comes out. They really want to figure out something before Asia markets open. Tomorrow could be a really nasty day.

In other news JP Morgan is in talks to buy Washington Mutual. With all these buyups and mergers the results remind me more and more of the 1907 panic where its believed that JP Morgan spread rumors of bank insolvency in order to buy their assets up cheap after the bank run which would inevitably occur. The neo-merchentialist/corporatist system we have continues to increase the power and wealth of the bankers and power elite at the expense of all the rest and the public continues to dig their own grave by playing into the hands of the banks and politicians by requesting more regulation and nationalization which only further expands their power.

For those interested in knowing more about the history of banking in the United States, The Great Depression and why the Federal Reserve System is bad:

America’s Great Depression

• Free: http://mises.org/rothbard/agd.pdf
• Print: http://www.mises.org/store/Americas-Great-Depression-P63.aspx

History of Money & Banking in the United States

• Free: http://mises.org/books/historyofmoney.pdf
• Print: http://www.mises.org/store/History-of-Money-and-Banking-in-the-United-States–P191.aspx

The Case Against The FED

• Free: http://mises.org/books/fed.pdf
• Print: http://www.mises.org/store/Case-Against-the-Fed-The-P69.aspx

I just checked the news and it looks like Bank of America has pulled out too. The Fed is claiming it won’t provide any funds to prevent the collapse. Tomorrow is not going to be pretty. I also noticed that Mr. Greenspan is saying the obvious: “the U.S. credit squeeze has brought on a “once-in-a-century” financial crisis that is likely to claim more big firms before it eases.”