The latest balance sheet of the Federal Reserve makes me wonder whether it's solvent. That's because its balance sheet has clearly deteriorated in the last year. And with $40 billion in capital, that deterioration could take a big bite out of the Fed's capital.

Unfortunately, I do not know enough about how the Fed gets its capital or how it accounts for the value of its assets and liabilities to be able to do more than raise questions. But here are three things that concern me:

• Declining asset quality. The total value of the U.S. Treasury securities on the Fed's balance sheet declined by $312 billion between July 2007 and this July -- a 43% drop in this highest quality asset.
• Increase in shakier assets. During this same period, the balance in Term Auction Facilities -- the credit line that investment banks are using to get their shakier assets -- such as Collateralized Debt Obligations (CDOs) off their balance sheets --increased from $0 to $150 billion. Another $29 billion in assets come from Maiden Lane, LLC -- the entity created for the Fed to take on the toxic waste that sank Bear Stearns.
• High leverage. While the Fed has more capital backing up its assets than the typical investment bank -- which holds $1 of capital for every $32 in assets -- the Fed is still highly leveraged -- with only $1 of capital for every $23 of assets -- it borrows the rest. Put another way, if the Fed was forced to account for its balance sheet on a mark-to-market basis, a mere 4.5% decline in the value of the Fed's assets would wipe out its capital.

These observations raise questions in my mind:

The heads of Bear Stearns and Lehman Brothers (NYSE: LEH) say that Goldman Sachs (NYSE: GS) did them dirty. According to The Wall Street Journal, "the big securities firm has come under suspicion, at least from the chiefs of two rivals who have questioned in recent months whether Goldman, even indirectly, might have put pressure on their firms' stocks."

As would be expected, Goldman said "no way."

So far, no definitive evidence has surfaced that Goldman did anything wrong. More to the point is the issue of why it would bother. Both Bear Stearns and Lehman are substantially smaller than Goldman, the premier investment bank in the world. It would have very little to gain by damaging such small rivals.

But as it always true when large companies are charged with taking illegal actions against competition, the most important cause to suspect is stupidity. If anyone at Goldman took the risk of acting to harm the two smaller brokerages, it was simply because they did not have the sense that their creator gave them.

Douglas A. McIntyre is an editor at 247wallst.com.

MAJOR PAPERS:

• People familiar with the issue said that European regulators are gearing up to file new antitrust charges against Intel Corporation (NASDAQ: INTC). The charges, the Wall Street Journal reported, would allege Intel gave major European retailers an incentive not to sell computers that use Advanced Micro Devices Inc (NYSE: AMD) chips.

OTHER PAPERS:

• The New York Times reported that News Corporation's (NYSE: NWS) New York Post and The Daily News, owned by Mortimer Zuckerman, are exploring a print pact and have been in talks to find ways to combine some business functions of the papers, according to people briefed on the matter.
• According to sources, the San Francisco Business Times reported that Washington Mutual Incorporated (NYSE: WM) may be planning more layoffs in September. It is unclear how many employees will be affected and from which departments.

WEB SITES:

• In an effort to preserve capital, data compiled by Bloomberg showed that troubled mortgage companies Federal National Mortgage Association (NYSE: FNM), or Fannie Mae, and Federal Home Loan Mortgage Corporation (NYSE: FRE), or Freddie Mac, may cut dividends after more than $11B in combined losses since last year.
• Three people familiar with the matter said that the SEC subpoenaed Wall Street investment banks including The Goldman Sachs Group Inc (NYSE: GS), Deutsche Bank AG (NYSE: DB) and Merrill Lynch & Co Inc (NYSE: MER) in its hunt and crack down on suspected manipulation of Bear Stearns and Lehman Brothers Holdings Inc (NYSE: LEH) shares. Bloomberg reported that two of the people said the SEC, which yesterday curtailed short selling in financial stocks, is looking for e-mails and trading records and is also examining whether securities firms have "adequate controls" to deal properly with misconduct.

With shares in Lehman Brothers (NYSE: LEH) losing another 14% of their value Monday, and the stock trading under $13, rumors are swirling as to what the bank is planning to do. While there has been speculation that the bank may be taken private, an option that I think is very interesting, others have said that another bank is going to swoop in and take over the company. At the discount levels the stock is trading, that may make sense. The only problem is who the buyer will be.

MarketWatch has an interesting article about this issue and the claim is that there really is no one out there to make a bid for the struggling investment bank. The article quotes Jeff Harte, a securities industry analyst at Sandler O'Neill & Partners, " I'm hard pressed to give you many viable buyers of Lehman. Most large banks are focused on their own capital issues. Even if a bidder did come forward, it would have to win over a lot of Lehman employees -- who control around 30% of the stock -- or risk losing them once the deal was complete."

The most obvious suitor would be JPMorgan (NYSE: JPM), but it has its hands full with Bear Stearns. Other banks like Citigroup (NYSE: C) or Wachovia (NYSE: WB) are fighting for survival. That leaves us with European banks, many of whom are also trying to stay afloat. One bank that has the money needed to finance a deal could be Deutsche Bank (NYSE: DB). It could be interested in a deal as it would gain a foothold into the fixed-income desk at Lehman. The only problem is that the bank is focused on growing its retail banking franchise, not investment banking.

Which leaves us with the first option as the best one. Go private. Clean up the balance sheet, get profitable, wait a few years for the financial storm to pass, and go public once again.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/15/08.

I try not to do posts solely for the purpose of linking to someone else's great work but this item fro DealBreaker is probably the funniest thing I've read since Bear Stearns' insistence that its liquidity was fine: an article in the latest issue of Vanity Fair cites unnamed sources stating that a few well-known hedge funds plotted the company's demise -- and then laughed about it over a celebratory breakfast.

Bess Levin rips into the conspiracy theories with the post Who Killed Bear Stearns And Then Laughed About It At Denny's? We're Gonna Go With NO ONE:

Let's just say they did spread the rumors, which I don't believe they did (and, as an aside: if a company can be brought down by the corporate equivalent of 7th grade girls passing notes in class, perhaps it doesn't deserve to existence anyway). There is no way in hell this meal took place. Ken Griffin and Steve Cohen are not stupid enough to go chest bump over egg McMuffins with the rotting corpse of Bear Stearns at their table (that kind of genius is -- or was -- reserved for the upper echelons of BSC management).

Exactly.

Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees.

Many of them were the stocks we might have looked to in the past for stability, so you can be sure I put forward my five candidates with a little trepidation, but forward I go anyway. First a little review is in order.

Citigroup Inc. (NYSE: C) dropped from around $53 per share last year to around $30 in January and we can buy it today for around $17. Even at that price Goldman Sachs (NYSE: GS) has downgraded it to a sell and thinks there is more bad news to come. Citigroup was the largest bank in the world. Not any more.

General Motors (NYSE: GM) was the largest car maker in the world. That was before the stock tumbled from $43 to its current $11 range. A crushing blow to long time investors hoping that someone in the company could stop the ship from sinking.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Ralph Cioffi and Matthew Tannin were indicted on June 18, 2008. They are accused of a litany of fraudulent activities in connection with the demise of two hedge funds they managed for Bear Stearns.

Cioffi and Tannin are entitled to the presumption of innocence. The obligatory "perp walk," staged for the benefit of the press, is offensive to traditional notions of justice. Not only does it demean and humiliate them, it taints the jury pool and intrudes upon their right to a fair trial.

Nevertheless, the indictment offers an insight into conduct that would otherwise be inexplicable.

Here are two highly educated, sophisticated, fund managers who achieved the American dream -- and then some. Why would they risk it all by, as alleged, misrepresenting the risk of these funds, and their personal stake in them?

MAJOR PAPERS:

• Long Island, NY's Astoria Financial Corp (NYSE: AF) has found a novel way to reduce the number of its nonperforming loans by changing its internal policy on when mortgages are classified on its books as troubled, the Wall Street Journal reported. By counting home loans as non performing when the borrower misses at least three payments, not two, Astoria reduced its non-performers to $69M from $106M in three months.
• The Wall Street Journal also reported that the indictments of Matthew Tannin and Ralph Cioffi, two former Bear Stearns hedge-fund managers, are expected to cite a personal e-mail suggesting the funds were "toast," four days before they told investors they had little to worry about. JP Morgan Chase & Co (NYSE: JPM) has said it will cover the legal costs of the fund managers.
• Hewlett-Packard Company (NYSE: HPQ) is set to reorganize its printer unit. The Wall Street Journal said that the unit's five business units will be cut down to three to become more efficient at adapting to a marketplace in which consumers are relying less on printing.
• According to people close to the situation, the Financial Times reported that Anheuser-Busch Companies Inc's (NYSE: BUD) board of directors is planning to meet this week to discuss the $46B bid from rival brewer InBev.

Graphic novels are generally targeted toward a market the could best be described as anime freaks: junior high and high school kids who shop at Hot Topic, listen to bad music, and read graphic novels.

For reasons that aren't immediately clear, Portfolio decided to make the collapse of Bear Stearns Co. Inc. (NYSE: BSC) into a graphic novel, focusing on the days leading up to the fire-sale to the Fed-back JPMorgan Chase & Co. (NYSE: JPM). It's a neat idea but, by focusing exclusively on the company's last days, the comic portrays Bear's collapse as a run on the bank caused by malicious and unfounded rumors. The reality is that Bear made huge, risky bets on bad securities, and collapsed because of mismanagement. A "run on the bank" may have had something to do with it, but that's always the case: companies don't go under until people stop giving them money.

But in a financial press with a lot of very similar content, we should at least give Portfolio props for doing something a little different.

MAJOR PAPERS:

• The Wall Street Journal reported that executives from Ford Motor Company (NYSE: F) informed plant managers and union representatives that they intend to reduce overtime and that additional buyouts of union workers were necessary to cut costs.
• The Wall Street Journal also reported that federal prosecutors are preparing to file criminal charges against Ralph Cioffi and Matthew Tannin, two hedge fund managers at Bear Stearns, now part of JP Morgan Chase & Co (NYSE: JPM), with securities fraud.
• Investors who helped U.S. financial companies raise capital are currently losing nearly $10B on paper, according to an analysis by the Financial Times.

OTHER PAPERS:

• Fortune reported that the materials used to build Apple Inc's (NASDAQ: AAPL) new 3G iPhone could cost as little as $100, while the components of the old iPhone cost $170, according to analysis by Portelligent, an Austin, Texas-based teardown specialist.
• Steve Jobs appeared to be extremely thin during the unveiling of Apple's new iPhone last Monday, causing speculation by observers. Fortune speculated that Jobs' weight loss over the years is being caused by a complex operation he underwent in 2004, in order to treat a rare type of pancreatic cancer.

MAJOR PAPERS:

• UBS AG (NYSE: UBS) won't comment on write-down estimates, but according to the Wall Street Journal, investors are expecting it as prices for mortgage securities have significantly gotten worse over the past several weeks as evidenced by Lehman Brothers Holdings Inc (NYSE: LEH) profit warnings.
• Yesterday Lehman's stock fell 8.7% as the firm announced a projected $2.8B second quarter loss and a $6B capital raise. Options activity indicated a lessening volatility, the Wall Street Journal reported, a sign that perhaps the worst may be over.
• According to a person familiar with the matter, the Financial Times reported that China's Qingdao Haier has approached investment banks to advise it on a bid for General Electric Company's (NYSE: GE) appliance business.

OTHER PAPERS:

• A brief filed by plaintiffs in a shareholder lawsuit against Yahoo! Inc (NASDAQ: YHOO) and its directors claimed that an employee severance plan put in place to protect workers after a merger with Microsoft Corporation (NASDAQ: MSFT) should be repealed immediately. The New York Times reported that the plaintiffs believe the plan could skew the outcome of a proxy battle between Yahoo! and Carl Icahn for control of the company.

• If Lehman (LEH) isn't the second coming of Bear Stearns, won't "sell the rumor, buy the news" come into play?
  
  
Why can't I shake the sense that a serious downside dislocation is lurking in the wings this summer?


Given the massive two-sided directional potential, have you defined your risk (both ways) in kind?


After all, doesn't setting stops remove emotion?


Another day, another dime (10%) for WaMu (WM) the killer whale?


• What does it say that the New York Stock Exchange internals are still flat to the share?
  
  
• The kid' from Oakland - what did you expect?
  
  
How could it possibly take me this long to see Charlie Wilson's War?

R.P.

Bloomberg News reports that 10 of the biggest names in investment banking are blocking investors from getting their hands on their share of the $330 billion Auction Rate Securities (ARS) that they were told was as safe as a money market fund.

I first posted about this back in February and now it has 4,325 comments from people trying to get at their money. Bloomberg quotes one victim of frozen ARS syndrome: Franklin Biddar, a 65-year old real estate investor who can't get his $100,000. "I can't do anything," said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. "Bank of America (NYSE: BAC) got me into these securities that are supposed to be as safe as a money market, and now they won't get me out."

Here's a list of the banks involved in this money blocking operation and the volume of municipal ARSs they issued between 2001 and 2007:

This post is part of a series on some of the most memorable companies that have disappeared.

Going, going, gone!

No more Bear Stearns. What a shame. It did not have to be, but alas -- bad management, greed, and too much negativity on Wall Street made it unsustainable when sustainability is the word of the day. It is, or should I say was, one of the foremost investment banks on Wall Street for many decades.

JPMorgan Chase (NYSE: JPM) completed it acquisition of Bear Stearns (NYSE: BSC) on May 30, 2008. As a result, Fitch Ratings has upgraded the ratings of BSC and removed them from Rating Watch Positive, where they were originally placed on March 17. As the direct and sole owner of BSC, JPM has assumed the capital structure of BSC.

Bear Stearns had been one of the top investment banking, clearing, and brokerage firms in the United States, serving major corporations, institutions, governments, and high net worth individuals. Through several subsidiaries, it provided asset management, lending, and merger and acquisition advisory services. It's been a leading market-maker for NYSE-listed securities (through Bear Wagner Specialists), as well as for OTC shares, corporate and government bonds, and derivative products.

It was these derivative loan instruments that did them in. Bear Stearns, a company that for decades was relied upon to help its customers assess risk, fell short when it came to managing its own. Management was not watching very closely, and if they were, they did not understand what they were seeing. (See Serious Money: The page on Buffett Part V: Company Management.)

TheStreet.com's Jim Cramer says lots of names out there have genuine earnings power.

At an investment symposium I attended last night, someone asked me whether I thought Lehman Brothers (NYSE: LEH) (Cramer's Take) was going under. I said, no, no I didn't think so. It's got a great franchise with a good cash position, reduced leverage, much better management than Bear and a buyback that's kicking in that wouldn't if things were as bad as the bears make it out to be.

So, the individual asked, would I buy the stock? I said, "Why the heck would I do that? To catch a 2- or 3-point rally? There is no earnings power at Lehman."

I explained that some stocks are neither longs nor shorts -- that, to me, is Lehman. There's no reason to short it, because I don't think it is going under but many are betting that way, and there is no reason to go long it, because the place is set up for a period of big fees from fixed-income products, from structured products, but clients have at last figured out that they will lose their jobs if they keep buying this nonsense.