http://money.cnn.com/…

“This is the first time in the history of United States that anything has been done by Congress to curtail excessive CEO compensation,” said House Financial Services Chairman Barney Frank, D-Mass, on Sunday. “It’s not everything we’d like, but it’s a very good beginning.”

“A very good beginning.”? They regulate the hell out of the corporations which they help artificially inflate by supporting the Federal Reserve System. Effectively controlling a significant portion of their business. Now they are nationalizing components of them or creating sweetheart deals for their friends in other firms by taking over a failing company instead of letting them work through bankruptcy. Allowing the likes of Citi Group and JP Morgan Chase to purchase assets deemed nearly worthless by the FDIC. Now Frank is bragging about how they have a foot in the door to controlling salaries of CEOs. If that’s the beginning the end is little better than complete state socialism/communism or the more likely fascism.

Is he ignorant or malicious? I hope the former. Perhaps than he could be convinced to read F.A. Hayek’s The Road to Serfdom.

Short sales are prohibited. JPM issues $10b in stock during that blackout. The stock price did not become diluted but on Friday rose 11% even with a threat of Q3 loss. Those who may want to short, can’t. They pick up WaMu assets dirt cheap due to the fed seizing things and claiming them effectively worthless and not allowing the market deal with their bankruptcy. Obviously that’s after the fact they’ve done this with other failed companies. Given that JPM is a partial owner of the Federal Reserve, their size, connections, and history of the Federal it’s unsurprising that Bernanke, Paulson and friends show favoritism toward them.

While I disagree with some of what he proposes I think generally he’s pointing out important aspects which need to be looked at in the least.

http://www.nytimes.com/…

Goldman Sachs and Morgan Stanley, the last big independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night, a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age.

The firms requested the change themselves, even as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms. It was a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.

It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act.

By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.

I’m fine with this outcome in that the Glass-Steagall Act has been effectively nullified as far as I can tell. However, it makes me wonder if this was all part of some plan. Yes these firms will become more regulated in some ways but in what way does it harm them vs harming smaller firms. Morgan Stanley has had its Utah based industrial bank and word is they have been looking at the benefits of becoming a bank holding company for a while now.

So now they are a net less risky. They claim revenue will be down as a result as will bonuses and perhaps pay. We shall see. How long till the government forgets what led us here and creates the environment for a bubble again? If we make it out of this one… likely not long.

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.bloomberg.com/…

Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation’s financial system, said the central bank may extend its emergency-loan program for investment banks into next year.

“The Federal Reserve is strongly committed” to financial stability and is “considering several options, including extending the duration of our facilities for primary dealers beyond year-end,” Bernanke said in a speech to a conference in Arlington, Virginia.

Woot! More inflation!

Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should “take a leading role in any such process” in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.

So like enforcing the current bankruptcy laws? I somehow doubt it.

Fed officials are working with the Securities and Exchange Commission and securities dealers “to increase the firms’ capital and liquidity buffers,” Bernanke said.

More inflation!!

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the same conference that he supported Fed and Treasury proposals for “policies, because of what happened, to take proper action if a large investment bank goes bankrupt.”

Of course he does. He, and the rest of Wall St., directly benefit from this intervention and inflation.

Without any liquidation procedure in place, the Fed in March decided to make a bridge loan to keep Bear Stearns out of bankruptcy. The central bank then agreed to take on $30 billion of hard-to-trade Bear Stearns assets to help secure its takeover by JPMorgan.

“The Federal Reserve in essence bought $30 billion of mortgage product from Bear Stearns; I want to remind people we bought $350 billion,” Dimon said today. “We don’t really think” the deal will end up costing taxpayers money, he also said.

I do. Anyone with a cursory understanding of economics could see that taxpayers will be both directly and indirectly paying for this. The indirect in terms of all the likely new regulations and powers the Fed will get on top of the inflation that will continue to destroy the middle class and poor are likely the greatest costs.

Congress should legislate “consolidated supervision” of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, Bernanke also said today.

The Fed should also get “explicit oversight authority” over payment and settlement systems, putting the it on a par with counterparts from around the world, Bernanke said.

U.S. central bankers will already play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC. The two agencies will collaborate in determining “guidelines or rules concerning the capital, liquidity and funding” arrangements of investment banks, the accord said.

Because obviously planned economies have worked so damn well. They function like clockwork everywhere they have greater control. Right Ben?

http://money.cnn.com/…

The Federal Reserve did not have any advance warning of the impending financial collapse of Bear Stearns (NYSE:BSC) , but now has examiners onsite at investment banks to evaluate their capital situation and potential risks, Fed Chairman Ben Bernanke told Congress’s Joint Economic Committee this morning.Bernanke said the first notification was on the morning of Thursday, March 13 that the liquidity position of the company had deteriorated drastically and that it would file for Chapter 11 bankruptcy reorganization the next morning unless some financing was arranged.

The Fed and Treasury arranged 30 bln usd of financing through JP Morgan Chase. ‘We did not bail out Bear Stearns,’ Bernanke told the committee. ‘We did what we did because it was necessary to maintain the integrity and viability of the financial system.’ While Bernanke said the actual financial risk to the Fed in taking on suspect securities as collateral for the loan was nowhere near the potential 29 bln usd now on its books (JP Morgan would take the first 1 bln usd of any losses), he also told the committee: ‘I’d hope not to ever do it again’.

Because the Fed has now opened up its discount window for direct lending to investment companies as well as banks, the Fed now has its bank examiners on site at the investment companies to assess their financial positions and Bernanke said he did not expect another Bear Stearns-type situation to occur.

I don’t doubt they didn’t realize that Bear Stearns was in trouble till that Thursday but they should have known something like that was likely to happen. Bernanke could have ratched down the interest rates slowly starting 6 months ago but if he had the market would have dived because it would have meant there was suspicion of a problem. Which would have been accurate and a dive at that point would have likely been nothing in comparison to what we have now. Several things really frighten me about all this. 1. The opening of the loans to investment firms creates a whole new level of central control corruption. 2. The word has come out that they have been planning to do that since last year. 3. “We did not bail out Bear Stearns.” Bullshit. bailout: A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business’s downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement. 4. ”We did what we did because it was necessary to maintain the integrity and viability of the financial system.” This shows how fragile things are. If a single company failing can cause the public to lose faith in the entire financial system sounds to me that system deserves it. 5. From what I’ve gathered the Fed had offered loans to the investment firms before Bear Stearns had bad problems so why didn’t they take out a loan from the Fed to cover their position? Why did the Fed supposedly push so hard for the $2 a share deal and get pissed at the $10 a share deal? Something happened behind the scenes we don’t know about and even though Ben “hope[s] not to ever do it again” I think we are more likely to head toward the Nordic system the Bush administration was talking about then go back to a freer economy based on personal responsibility and honest money.