End of an Era

The age of the big, stand-alone investment bank appears to be over.

Morgan Stanley and Goldman Sachs give up their status as investment banks to protect them from the storm that has seen their rivals destroyed.

After the collapse of Bear Sterns, firesale of Merrill Lynch and liquidation of Lehman Brothers, they were the only two remaining top investment banks on Wall Street.

In exchange for much tighter regulation by the Federal Reserve, the banks have transformed themselves into bank holding companies with greater access to central bank reserves but without their previous leverage.

Bailout plan gets bigger

There's a guy named Don who still owes me $800 from about 15 years ago. I had given up hope of ever seeing any of that money, but now I'm hoping to convince Secretary Paulson to roll it into the big Wall Street bailout plan. It wouldn't be any more ridiculous than what's already on the table.

Just two days ago, the Bush administration's Cash for Trash buyout was restricted to mortgage-based assets held by American companies.

Today, after Wall Street lobbyists have had a chance to weigh in, the scope of the bailout has expanded to any kind of debt.

Officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said.

``The costs of the bailout will be significantly higher than originally considered or acknowledged,'' said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. ``How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''

Oh, and the bailout is no longer restricted to American companies, by the way.

In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night.

[...]

The legislative outline that went to Capitol Hill at 1:30 a.m. Saturday had said that an eligible financial institution had to have “its headquarters in the United States.” That would exclude foreign-based institutions with big U.S. operations, such as Barclays, Credit Suisse, Deutsche Bank, HSBC, Royal Bank of Scotland and UBS.

But a Treasury “Fact Sheet” released at 7:15 Saturday night sought to give the administration more flexibility, with an expanded definition that could include all of those banks: “Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.”

So, UBS, the Swiss banking conglomerate where Phill Gramm is a board member, could get a piece of the $3,000 that you are ponying up to rescue Wall Street from its folly. Yes, that would be the same Phil Gramm who caused this whole problem in the first place.

Viva, capitalismo!

Smoking Gun - McCain's campaign manager lobbied McCain on behalf of Fannie and Freddie

John McCain has been pulling out all the stops to make people think that Barack Obama was, in McCain's words, "square in the middle" of the housing finance scandal.

Obama wasn't, and McCain knows that.

What we have here is a classic Rovian gambit: project your own vulnerability onto your opponent. The New York Times reports this morning that, if anybody was "square in the middle" of the mortgage meltdown, it was John McCain and his campaign manager Rick Davis.

[L]ast week the McCain campaign stepped up a running battle of guilt by association when it began broadcasting commercials trying to link Mr. Obama directly to the government bailout of the mortgage giants this month by charging that he takes advice from Fannie Mae’s former chief executive, Franklin Raines, an assertion both Mr. Raines and the Obama campaign dispute.

Incensed by the advertisements, several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000. Some who came forward were Democrats, but Republicans, speaking on the condition of anonymity, confirmed their descriptions.

“The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month. Mr. Davis “didn’t really do anything,” Mr. McCarson, a Democrat, said.

[...]

In an interview Sunday night with CNBC and The New York Times, Mr. McCain noted that Mr. Davis was no longer working on behalf of the mortgage giants. He said Mr. Davis “has had nothing to do with it since, and I’ll be glad to have his record examined by anybody who wants to look at it.”

Fannie and Freddie were willing to pay Davis $35 thousand a month for two years due entirely to his relationship with McCain, who poses himself now as the scourge of lobbyists and financiers. McCain's blathering about "gaming the system" makes more sense now. He knew this ticking bomb was out there, ready to explode, and last week's lies were a pre-emptive, defensive smear against Obama. Classic Karl Rove. It's not a coincidence that Rove's proteges are running McCain's campaign.

This must be that McCain honor we keep hearing so much about.

Pension fund sues Freddie Mac over mortgage losses

The Ohio Public Employees' Retirement System (OPERS) is alleging fraud in a lawsuit against the Federal Home Loan Mortgage Corp.

The suit says Freddie Mac swindled OPERS out of $27 million when it "secretly and intentionally participated in one of the largest housing investment deceptions in modern U.S. economic times."

The lawsuit, filed Friday in federal court in Youngstown, alleges that Freddie Mac downplayed its investments in subprime lenders before its stock nosedived in November on news that it lost $2 billion in the third quarter, largely because of the collapse in the subprime market.

The Ohio Public Employees Retirement System, which represents nearly 900,000 current and retired government employees and their beneficiaries, lost up to $27.2 million in the crash, the lawsuit alleges.

[Ohio Attorney General Marc Dann's] office has named the retirement system as the lead plaintiff in the case, which could broaden to include other public pension plans.

In a press release announcing the lawsuit after the close of business yesterday, Dann said he is determined to hold mortgage lenders accountable for their role in the collapse of the subprime market.

RIP, Super-SIV

A plan to construct a bailout vehicle for investment funds hit hard by the mortgage crisis is being abandoned.

At the behest of the Treasury Department, Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. have been working since September to set up the fund, which would buy assets from so-called structured investment vehicles. SIVs have been battered by the credit crunch, with investors refusing to buy the short-term commercial paper that the funds' issue to buy higher-yielding assets, in particular securities backed by subprime mortgages.

Lack of interest has led the banks to drop the plan -- known as the Master-Enhanced Liquidity Conduit, or M-LEC. In many cases the banks, in particular Citigroup, that were supposed to sell assets to the fund have instead bitten the bullet and moved the assets onto their own balance sheets, alleviating a key rationale for the rescue fund.