I still remember when I realized that a real estate crisis was on its way. My wife and I were contemplating buying a home in Roanoke, Virginia, and began talking to a mortgage broker. When we saw the final offer, we realized that, if the real estate market continued on a stable path, and if the (then marginal) neighborhood continued to have a declining crime rate, and if the price of gas didn't go up, and if neither my wife nor I became seriously ill, then we would be great. In five years, when the rate went variable, we would refinance and everything would work out beautifully.

That was in 2004.

Thinking about it, my wife and I soon realized that those were a lot of ifs; while we wanted the house, we knew that we couldn't base our financial future on a deck of cards. After turning down the offer, I thought more and more about it and began to get worried. If a lot of people were buying into the kind of mortgage that my wife and I had declined, and if they had similar expectations about refinancing when their rates went variable, then it seemed likely that the mortgage industry was sitting on a major time bomb.

Thanks to what former Enron CEO, Jeff Skilling, called bad "optics", some top Wall Street executives announced that they're foregoing their normal seven figure bonuses. But I think I am being generous in estimating that those potentially symbolic gestures will only shave a few billion off the Wall Street bonus pool for 2008. We could still be paying $20 billion in bonuses this year.

How so? After buying $159 billion worth of preferred stock in 24 banks, I have not seen any evidence that the Treasury required the banks to lend it out. There is nothing stopping the banks from using the money for paying bonuses. And while the original estimate of 2008 bonuses was down 20% from 2007 -- to $26.6 billion -- I am thinking that eliminating executive bonuses could lead to at least a $6 billion lower figure -- particularly if this cut provides bank CEOs leverage to reduce the amount of bonuses paid to lower level people.

So far, top executives from Goldman Sachs (NYSE: GS), UBS AG (NYSE: UBS), Deutsche Bank, and Barclays have said they will skip their bonuses for 2008. Ironically, the ethically challenged UBS has the most interesting idea -- starting in 2009, it will be able to claw back bonuses in the years after their award with a third paid immediately, while the remainder will be put into a participant's account and can be reduced if there is a loss at the division or the whole bank. I started proposing an escrow account along these lines in October 2007.

Here's a scary bit of news: the Federal Reserve Bank of New York has hired (subscription required) Michael Alix as a senior vice president in the Bank Supervision Group. His qualification? He was Bear's chief risk officer from 2006 until 2008 when the firm imploded -- due to too much risk. That disaster led to a taxpayer funded emergency sale to JPMorgan Chase (NYSE: JPM).

But I guess it makes sense in a way. If you want to understand the dangers of excessive risk and leverage, who better to help than the guy who helped blow up one of America's most respected financial institutions. It's kind of like hiring Amy Winehouse to teach kids about the dangers of cocaine.

I wonder how much he'll be paid. Given how much money he's already cost the financial system and taxpayers, he should be working for free. But I somehow doubt that he is.

Economist Paul Kasriel had a good line in The Wall Street Journal: "The Fed is not only the lender of last resort, it's also the employer of last resort."

Maybe so. But at this point, Mr. Alix would probably be better suited to a job scrubbing the fry-o-lator at a fast food restaurant.

Goldman Sachs (NYSE:GS) has been the premier investment bank in the world for decades. It has been the leader in underwriting fees, M&A, and proprietary trading profits for longer than many bankers can remember. It has also sent senior executive from the company to work in the highest level jobs in Washington.

But, the firm is not immune to the credit crisis. It earnings have been hurt, although less than those of most other financial firms. So, it comes as some surprise that it will cut 10% of its 32,000 person workforce. According to The Wall Street Journal. "The cuts, expected throughout the New York-based company, underscore how much even the mightiest securities firms have been shaken by the 16-month credit crisis."

The news may be bad for Goldman but it is awful for almost every one of the company's competitors, most of which are doing much worse than Goldman is. Some corporation in the industry have already lost people. especially Bear Stearns and Lehman. But, the cutting may have only just begun elsewhere. Several analysts recently put out reports saying Citigroup (NYSE:C) may not make money for over a year.

There had been some hope that the Paulson rescue would improve financials at big banks by enough so that they would not have to take drastic measures, but the capital may not be enough if mortgage markets get worse. If Goldman can cut over 3,000 people, its competitors are probably looking at much larger numbers. There are tens of thousand of Wall St. jobs at risk.

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

With SEC Chairman Chris Cox using his light saber to battle the imaginary sith lord of naked short selling, SEC Inspector General David Kotz has released a fourth report criticizing the commission for its oversight of Wall Street over the past two years.

According to The Wall Street Journal (subscription required), Kotz found that the SEC's Miami office dropped a case against Bear Stearns "and others despite negotiating a $500,000 settlement with the investment bank for failing to supervise a former employee. The case, which was described as 'strong' by at least three enforcement staffers, was dropped without being presented to the five-member commission for a vote."

The head of the Miami office, David Nelson, told Bear Stearns lawyers that "Christmas is coming early" this year, and "Bear Stearns can keep their money." The case involved an employee who was alleged to have given inappropriately high valuations to bonds and loans held by a Puerto Rican bank.

The SEC's enforcement staff responded to the report by saying that it is "misleading, and all too often relies on speculation and innuendo to support its harsh conclusions."

Harsh conclusions? You mean like the collapse of the financial sector and a $700 billion taxpayer funded bailout?

It's unclear whether a $500,000 settlement would have changed anything, but the announcement might have tipped off investors to the huge problems at Bear Stearns before it was too late.

Everything is upside down these days. The folks with all the money and multi-million dollar bonuses are begging for a handout on the pretext that the economy will crash if they do not get one. We're not talking money for coffee or a snack, we're talking billions of dollars.

It is crashing anyway, or at least sinking. It is just a matter of what it takes down along the way. Apparently, the folks at the Treasury and Federal Reserve are now convinced that it will be everything.

The survivors are pawing at the defeated as Wells Fargo tries to grab Wachovia despite its previous tentative agreement with Citigroup Inc. (NYSE: C). While Citigroup gained a point in Wachovia deal over the weekend, the balance has since tilted in favor of Wells Fargo again.

Bank of America (NYSE: BAC) gobbled up Countrywide (done) and Merrill Lynch (NYSE: MER) (a work in progress), while JPMorgan Chase (NYSE: JPM) corralled Bear Stearns and Washington Mutual (NYSE: WM).

Sadly, only the federal government was big enough to swallow the problems of American International Group (NYSE: AIG), Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Otherwise,those in the know think world financial markets would have crumbled due to the collateral damage, (pun intended).

When I posted Congress is screwing up -- think backstop not bailout!, I was concerned with the psychological effect as much as the financial effect of not approving the funding, but no doubt the people suffering the most are not those who created the pain.

The Securities and Exchange Commission, or NAMBLA for short, is focusing its resources on an investigation of whether gossiping short sellers hastened the collapses of Lehman and Bear Stearns by spreading rumors.

The SEC is looking into a variety of rumors that spread in the days and months before the companies collapsed, including suggestions that some counter-parties had stopped trading with the firms.

I'll quote DealBreaker's brilliant commentary on the collapse of Bear Stearns:

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 be in existence anyway).

It's a shame that the SEC is tossing its very limited resources into wild goose chases that serve to intimidate the people who were smart enough to predict trouble at companies like Bear and Lehman, long before either company was giving investors the full story.

In the end, the short sellers were proven right because Lehman was insolvent, and a buyer couldn't even be found at $1. You can only blame the company's management for creating that mess.

The SEC has been accused of being flat-footed on the issue of short selling. The impression among the media and some politicians is that the agency has failed its charter to be the primary watchdog over markets on a number of occasions. John McCain even said he would fire Christopher Cox, the SEC chairman.

Adding to the disdain is a report from inside the SEC itself issued by the agency's monitor of internal controls. According to The Wall Street Journal (subscription required), "Inspector General David Kotz said it is 'undisputable' that the SEC 'failed to carry out its mission in its oversight of Bear Stearns.'" Kotz says the SEC was aware of the threats posed by subprime mortgages and did nothing.

The news adds to the perception that if the federal government had been on top of the credit crisis beginning in early 2007, a number of large banks and brokerage firms would not have failed or watched their shares lose 80% of their value. Based on this point of view, the government is liable for hundreds of billion of dollars loses suffered by common shareholders and bond holders.

Private enterprises rarely have any success suing government agencies. in many ways that is a practical way to keep the courts from being overwhelmed by people with grievances against federal authorities. But, the inspector general's comments do say that investors in the firms which failed were not fools. They simply never had the benefit of assistance from the one agency which should have protected them.

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

Some of you will remember this story from last November when the door to our current world-wide financial industry meltdown was just beginning to crack open. At that time, we were facing tens of billions of dollars in losses and write-downs, but now we have witnessed hundreds of billions of dollars of the same and the government is telling us that it will take another $700 billion to shore up the industry.

Naturally, most of the people that got us into this mess are receiving golden parachutes as they abandon or are ejected from their burning empires. President Bush has been in over his head for years and turned a blind eye, (I think blind in both eyes) see: The George W. Bush economic plan? The shame does not end with Bush, though he has shown no leadership on the subject.

Sen. Christopher Dodd, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, said of the recent Fannie Mae and Freddie Mac bailout, "Americans deserve to know if this proposal will help keep mortgages affordable, stabilize the markets and protect taxpayer interests."

Where were Bush and Dodd when the foundation for this crises was being developed See: SEC opens the gates and the world drowns.

The entire political system is jam-packed with conflicts of interest. Here are Senators Dodd's contributors by firm and industry as reported by OpenSecrets.org:

• Top 5 Contributors, 2003-2008: Citigroup Inc. $310,294, SAC Capital Partners $282,000, United Technologies $263,400, American International Group 224,678, Bear Stearns $205,600.
• Top 5 Industries, 2003-2008: Securities & Investment $,245,796; Lawyer/Law Firms 1,976, 063; Insurance $1,416,972; Real Estate $1,262,791; Commercial Banks $850, 544.

Late Sunday night it was reported by the Associated Press that the Federal Reserve announced it had approved the request of the two investment banks, Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS), to become commercial banks and to take deposits, bolstering the resources of both institutions.

Since Bear Stearns was acquired in a fire sale by J P.Morgan Chase (NYSE: JPM) in March both firms have been under increased pressure to show their financial strength, but the bankruptcy of Lehman Brothers Holdings (NYSE: LEH) and the buyout of Merrill Lynch (NYSE: MER) by Bank of America (NYSE: BAC) last weekend have changed the playing field too much.

So what does this mean in short? It means the investment banks wanted the comfort and security of mama bear. They wanted the protection of the Federal Reserve, along with the ability to borrow from it at the discount window, and in a worst case scenario, to be bailed out like everyone else.

The Fed, from its perspective, knows this to be true and understands that if the investment banks -- now commercial banks -- can increase their reserves, then maybe a bailout will not be required, which is better for everyone. Along with this change will come additional requirements and regulation.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: I owned BSC and now own shares in its acquirer JPM.

I've put together a good-sized Enron memorabilia collection, inspired by the affordability. I was able to buy an Enron lunch bag on eBay for less than the cost of a similar nonbranded product at Wal-Mart.

The collapses of Lehman Bros. and Bear Stearns aren't anywhere near as interesting but the headlines have attracted a swarm of eBay listings. According to The New York Times, "When a big Wall Street firm goes belly up, one bet you can take to the bank is that memorabilia will be offered for auction on eBay within hours. "

If you're looking to support a charity instead of an opportunist -- or burned employee who, having lost his 401(k) grabbed a stack of mugs on his way out the door -- one seller sold a piece of toast with the initials "BS" and "LB" branded on each side. Proceeds benefit the Children's Diabetes Foundation in Denver. The price? A mere $15.50. A piece of toast that offers the ticker symbols of companies about to collapse would likely be worth far more.

As an investment, I don't think Lehman and Bear memorabilia are compelling: collectibles from the Enron and Worldcom blowups do not appear to have appreciated in value.

Lehman Brothers Holdings Inc. (NYSE: LEH) is likely to file for bankruptcy today. The reason is that the Treasury and White House are smarting from criticism of their $29 billion bailout of Bear Stearns and the $200 billion to $800 billion Fannie and Freddie nationalization. Neither of these moves has stopped the serial sell off in the shares of investment banks and other firms saddled with crumbling real estate assets. So now the powers that be have decided that they'll tighten up their moral standards and refuse to bailout Lehman.

As I posted, the basic problem is that Wall Street thinks the Treasury will cave in and put money into the Lehman bailout. But despite reports of a proposal to hive off the good part of Lehman from the bad part -- financed by other Wall Street banks -- such a resolution does not appear likely. That's because Wall Street does not want to risk its slim capital shoring up Lehman's bad part -- $85 billion worth of commercial real estate and mortgage-backed securities (MBS). These banks rightly fear that they would lose their investments and sink the entire industry in the bargain. In addition, these bad bank financiers don't want to provide the backstop to enable the winner of the bidding on the good bank to surpass them by picking up Lehman's assets cheaply.

Assuming that plan does not work and that the government refuses to step in to finance the bad bank, this leaves two basic options: Lehman files for bankruptcy or other banks liquidate Lehman in an orderly fashion. Bankruptcy might be a relatively orderly process. According to FOXbusiness, "if Lehman entered into bankruptcy protection, the brokerage units would enter Chapter 7 liquidation and a court-appointed trustee would liquidate the firm's assets and give customers back their money. Generally, securities a customer holds at a brokerage firm are legally the investor's property, and aren't exposed to the claims of the firm's creditors." A bankruptcy would likely wipe out Lehman common shareholders.

Like Lehman (NYSE: LEH) before it, Merrill Lynch (NYSE: MER) is becoming a short-seller's dream. In the last five trading days, the stock has gone from almost $29 to under $17 on tremendous volume.

According to Reuters, "Looming large among investors' worries about Merrill are mortgage-backed securities and other structured debt held at two of its banking subsidiaries -- Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co."

The terrible trouble for Merrill and Lehman is that no one knows how badly their balance sheets have been damaged, not even their managements. As credit markets fluctuate and housing prices fall, the value of many financial instruments changes every day.

Bear Stearns was scuttled to a large extent because its large customers pulled out capital. Rumors will cause that.

With the rumors around Merrill, and the short-sellers' ability to fuel the fire, Merrill may be in for a awful week.

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

Hank Paulson is keenly aware that his Goldman Sachs Group (NYSE: GS) and Treasury predecessor, Robert Rubin, helped save the market by encouraging the then-head of the New York Fed to force Wall Street leaders to team up to save Long-Term Capital Management's collapse from taking down the financial markets. Just as George W. Bush needed to recap Iraq, so now does Hank Paulson need to recap that famous meeting in lower Manhattan.

Bloomberg News reports that the meeting -- which took place yesterday afternoon -- involved a rogues gallery of Wall Street executives coupled with Paulson and New York Fed president Tim Geithner. The message these regulators delivered was reportedly a simple one: "You need to solve your own problems, and we're not going to provide any more capital." But Wall Street -- as represented by the likes of "Citigroup, Inc. (NYSE: C)'s Vikram Pandit, JPMorgan Chase (NYSE: JPM) 's Jamie Dimon, Morgan Stanley (NYSE: MS)'s John Mack, Goldman's Lloyd Blankfein, and Merrill Lynch & Co., Inc.'s (NYSE: MER) John Thain" -- are convinced that the Fed will blink when it comes to the 158 year old Lehman Brothers Holdings (NYSE: LEH).

Bank of America (NYSE: BAC) reportedly wants to put in a bid for Lehman contingent on getting government help -- such as the $29 billion JPMorgan got in its Bear Stearns acquisition and its nationalization of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). After these two precedents, Paulson now wants to reverse himself. He says Lehman is different because people have known it was in trouble for a long time and it can access the Fed's discount window. But I think this could just be a little show for the President who is worried about how this will look to history. He may not realize that he has already opened the Pandora's Box of moral hazard and can't shut it now.

It now appears almost certain that the federal government will takeover Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The amount of money the Treasury will have to put into the companies to improve their balance sheets will probably wipe out common shareholders.

The news may foreshadow what will happen to Lehman Brothers (NYSE: LEH) if its gets into more trouble The value of its commercial loan portfolio and mortgage-back securities is bound to fall as the real estate market gets worse.

Several outside investors, including Japanese broker Nomura and the Korea Development Bank, may pump money into Lehman. It is not good news that no one has pulled the trigger on putting up cash. All of the interested parties are probably waiting for Lehman's next quarterly earnings report. If the numbers are bad the value of Lehman's stock, which has gone from a 52-week high almost $68 to $16, could fall further.

The lesson from Freddie and Fannie (and, to some extent, Bear Stearns) is that the Fed and Treasury do not care about common shareholders. They get to go down with the ship.

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