So, I was flipping through some articles in Rolling Stone, when I found a very interesting economic story - yes, in Rolling Stone. The article, "Wall Street's Naked Swindle," takes a look at what happened in the options pits leading up to the death of Bear Stearns and Lehman Brothers. According to the article, an unknown option buyer made "one of the craziest bets Wall Street has ever seen," by shorting Bear Stearns. The unknown trader felt that Bear Stearns would lose "more than half" of its value in nine days or less, a bet that one financial analyst likened to buying 1.7 million lottery tickets.

What is crazy is that this bet paid off, leading to only one conclusion: insider trading (cue dramatic music). When Bear Stearns dropped from roughly $63 to $2 per share on March 17th (just six days later), the person purchasing the options made roughly $270 million. Senator Chris Dodd from the Senate Banking Committee thought that something wasn't on the up and up with this trade, and the Securities and Exchange Commission (SEC) promised it would look into the trade. Of course, nothing has happened since.

We already know that Jimmy Cayne was (we'll toss in the "allegedly" just to be polite) smoking marijuana, playing bridge, and golfing while Bear Stearns imploded.

But Charlie Gasparino reports that he was also doing something else: "In one of his last acts as CEO of Bear Stearns, James Cayne made a payment of around $2 million to a woman who was poised to file sexual harassment charges against its legendary chairman, Alan "Ace" Greenberg."

The collapse of Bear Stearns took place with lightning speed, and so did the publication of the first book about the firm's demise. Bear Trap: The Fall of Bear Stearns and the Panic of 2008 hit shelves in September of 2008, and is easily one of the sloppiest, worst business books written in a long time -- quite an accomplishment.

So William D. Cohan's more rigorous account of Bear Stearns has a pretty easy act to follow. Still, House of Cards: A Tale of Hubris and Wretched Excess is one of the best corporate failure books I've ever read, taking its place alongside Kurt Eichenwald's Conspiracy of Fools, a meticulous recounting of the collapse of Enron.

There's been no shortage of heartstring-jerking reports from the current economic crisis -- seniors whose retirement accounts have been wiped clean; families relocating from homes to motels; MBAs forced to wear their resumes on sandwich boards.

However, in my humble opinion, today's news might be the most pathetic: Sesame Workshop, the nonprofit organization that produces the classic Sesame Street TV show, is slashing 20% of its 355-member workforce.

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.

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.

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.

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.

In the last year, Washington has been shoveling our tax dollars out the door to bail out the money mistakes of multi-billionaires.

It cut interest rates from 5.25% to 2% ,which sent inflation soaring, yet mortgage rates remain higher than they were a year ago. It spent $29 billion to finance the merger of Bear Stearns and JPMorgan Chase & Co. (NYSE: JPM). And now it's about to spend as much as $800 billion to bailout a few huge investors who own mortgage-backed securities (MBS) issued by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

I find the reasons why this latest bailout shouldn't happen to be far more compelling than the reasons it should. (Here's some background on the mortgage giants.)

Here are five reasons I think this bailout shouldn't happen:

• Punishes the innocent and rewards the guilty. Why does it make sense for taxpayers -- most of whom are paying their mortgages on time and working hard to support their families despite declining real wages and higher costs -- be asked to dig into their pockets to clean up the errors of a few large institutional investors? Why not let the people who made the bad decisions pay for their own mistakes?

Henry Paulson is maneuvering himself into the history books by forcing Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) into a spiral of doom from which they can't recover. He had plenty of help from the directors and executives who sit atop them. But it's becoming clear that since Saturday's Barron's article, laying out the path to failure, events are spiraling out of Fannie and Freddie's control.

The anonymous senior government source in the Barron's article said that unless Fannie and Freddie could raise at least $10 billion each, the government would bail them out while wiping out common shareholders and eliminating the preferred dividend. This would lead to a sell off of bad loans, a split into smaller pieces, and maybe selling those pieces back to the public. All these activities are a government gift to Wall Street, which will get to do all these deals.

Events are following this predicted pattern as Fannie and Freddie struggle to raise capital. The New York Times reports that investors are not enthusiastic about the most recent efforts to raise capital by Freddie Mac. It reports that on Tuesday, Freddie Mac raised $3 billion in five-year debt but the "1.13 percentage points [premium] over the rate the federal government pays for comparable borrowing" was more than double the "0.6 points" premium it paid earlier in the year.