MAJOR PAPERS:

• The Wall Street Journal reported that after years of rapid grows, many hedge funds are shutting their doors or merging with others, as expansion has dramatically slowed. As a result, the industry is being dominated mostly by big firms, such as Och-Ziff Capital Management Group LLC (NYSE: OZM), D.E. Shaw & Co., and Paulson and Co.
• Shares of Ctrip.com International Ltd (NASDAQ: CTRP), China's major Internet travel booker with about 58% of the country's online travel business, have dropped about 30% in the last six weeks alone creating a possible buying opportunity, according to the Wall Street Journal's "Heard in Asia". Travel in China is expected to grow solidly in the long-term and Ctrip.com said it expects revenue to grow 30% for the three months ending June 30 from a year earlier.
• In a move that could potentially usher in a new phase in the credit crunch, the Financial Times reported that The Goldman Sachs Group Inc (NYSE: GS) is said to be close to finalizing a plan to restructure a $7B investment vehicle formerly run by Cheyne Capital, a London-based hedge fund.

OTHER PAPERS:

• The Washington Post reported the proposed merger between XM Satellite Radio Holdings Inc (NASDAQ: XMSR) and Sirius Satellite Radio Inc (NASDAQ: SIRI) was under fire yesterday by senior members of the Congressional Black Caucus, who said the deal does not provide enough opportunities for minority-owned programming.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Merrill, Lynch (NYSE: MER), Lehman Brothers (NYSE: LEH) and Morgan Stanley (NYSE: MS) are on the watch list at Standard & Poor's, the ratings agency that can make raising money very expensive for companies that get downgraded. Of the three, Lehman appears the most shaky with many expecting it to report a loss for the first time since it went public. Word is that the firm is trying to raise $3 billion to $4 billion to keep its capital base healthy. It's out there competing with many banks and insurance companies working on the same thing. Merrill Lynch already has its money in the bank but may need more.

The real problem all these firms have, along with all financial institution money raisers, is that they are loaded with securities they can't sell. They're called mortgage-back securities or Collateralized Debt Obligations (CDO's) or SIV's (Structured Investment Vehicles) or some other acronym. They all mean the same thing: no buyers anywhere at any price. It reminds me of the high inflationary days of the 70's when selling a 30-year bond was impossible. The joke was: What's the difference between a long term bond and VD? You can get rid of VD.

With this morning's market rising in spite of news of Credit Suisse (NYSE: CS)'s $2.8 billion write-down and the potential for $203 billion worth of additional Wall Street write-downs on various "structured investments", I began to wonder whether investors have already discounted all the bad news and the market will start to rise.

The Credit Suisse write-downs drew praise from analysts for their reflection of the strength of its risk management but they also shocked investors who sliced 9% of its stock. Credit Suisse took "fair-value" reductions -- an estimated price when no market price is readily available -- of its "structured credit trading positions" of about $2.85 billion. I am not sure why analysts praised Credit Suisse because it's not all that different from any firm struggling with how to value illiquid securities.

Meanwhile, UBS estimated that the world's largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles (SIVs), leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail -- and this assumption will soon be tested.

It seems as though every week, the public is forced to learn another one of Wall Street's strange names for a surefire deal that couldn't miss. But the reason we're learning about those strange names is because -- contrary to promises -- the can't miss deals are shutting down -- taking Wall Street's credibility down along with them.

The latest of these is auction rate securities (ARSs) -- a $330 billion market for long-term bonds that are supposed to pay lower rates because their interest rates are set through auctions. The New York Times reports that municipalities who issued ARSs are suffering because 1,000 of these auctions failed and instead of paying 3% interest rates, they have to pay 20%. And if that wasn't bad enough, the investment banks that oversee these auctions are refusing to let investors withdraw their money.

Which investment banks are imposing this pain? Goldman Sachs Group (NYSE: GS), Merrill Lynch (NYSE: MER), and Lehman Brothers Holdings (NYSE: LEH) and the problem with ARSs is not limited to municipalities entities such as the Port Authority of New York and New Jersey. Closed-end mutual funds, student loan companies and corporations also issue them.

MAJOR PAPERS:

• The active ingredient in Baxter International Inc's (NYSE: BAX) generic version of the anticlotting drug heparin, under investigation for four deaths and hundreds of bad reactions, was made in China, the Wall Street Journal reported.
• Structured investment vehicles that provide short term debt to fund the purchases of municipal bonds and student loans are under increasing pressure, according to the Wall Street Journal's "Heard on the Street". Citigroup Incorporated (NYSE: C), JP Morgan Chase & Co (NYSE: JPM) and Merrill Lynch & Co Inc (NYSE: MER) are among the banks that could be affected.

OTHER PAPERS:

• The New York Times reported that Hewlett-Packard Company (NYSE: HPQ) has settled with The New York Times Company (NYSE: NYT) and McGraw Hill Companies Incorporated's (NYSE: MHP) BusinessWeek journalists related to a spying scandal that stemmed from obtaining telephone records. The involved parties did not disclose the amount of the settlement.

WEB SITES:

• Mike Zafirovski, CEO of Nortel Networks Corporation (NYSE: NT), said the company would examine possible opportunities to be taken over "when they arise." Mr. Zafirovski did not comment on rumors of a Motorola Inc (NYSE: MOT) merger, Reuters reported.

Once again, the ever-incisive Financial Times columnist Martin Wolf, an economist, identifies with laser-accuracy what ills the current market. The problem, Wolf argues, is not a lack of solvency but a lack of liquidity (i.e. 'panic').

Wolf does not deny that there have been bad loans (there have been) or that no companies will go out of business (some will). But the circumstance that froze credit markets, that caused quality corporate bonds to fail to price, and that leads to 100-point spreads between the LIBOR rate (what banks charge each other) and the ECB's benchmark interest rate, is rooted more in a lack of confidence, than a lack of sound economic fundamentals or a lack of resources.

A lack of liquidity

And a lack of liquidity or 'panic' is something that central bankers can address. With the above in mind, the U.S. Federal Reserve's plan, in consultation with the European Central Bank, the Bank of England, the Swiss National Bank, and the Bank of Canada, to inject $40 billion via auctions into the financial system is appropriate and prudent. (Further, in addition to reciprocal currency arrangements, the companion central banks will take related actions, including the Bank of England's decision to accept a wider range of collateral on 3-month loans).

Today's announcement that Citigroup (NYSE: C) will take $49 billion worth of Structured Investment Vehicles (SIVs) onto its balance sheet suggests to me that its new CEO is following a path I wrote about earlier this week -- the first step of which is to take a big bath write-down fast. I think Citi stock will fall further before hitting bottom -- say $15.

Why is Pandit doing this? First, investors give a new CEO a chance to put all his predecessor's mistakes in the past through a write-down -- which generally includes closing businesses and firing staff. Second, Pandit probably realized that the alternative -- a fire sale of securitized assets (the average net asset values of SIVs tumbled to 55% from 71% a month ago and 102% in June) -- would be the lesser of two evils.

Nevertheless -- Pandit's move came with pain attached. Bloomberg News reports that two hours after Citi's announcement, Moody's Corp. (NYSE: MCO) lowered its credit ratings to Aa3, the fourth-highest level, from Aa2, saying "capital ratios will remain low." Citi's capital ratio is likely to tumble far below its target -- causing it to take further capital preservation moves. Specifically, its Tier I capital ratio is likely to hit 6.8% by the end of this year from 7.32% on September 30 -- far short of its 7.5% target.

Expect more unpleasantness -- like a cash dividend cut -- as Citi stock continues to tumble. But I think if it hits $15, it may be worth considering an investment.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Moody's securities.

New York Times op-editorialist Paul Krugman got one right today. And its Floyd Norris points out why the solution to the problem Krugman highlights could be SWFs (Sovereign Wealth Funds). Krugman does not know how much the financial industry's problems will cost and Norris suggests that SWFs -- government investment funds -- are worth between $2 trillion and $15 trillion.

Krugman's right that the Fed's four attempts to reboot the financial system have not worked because they dance around the most fundamental problem -- nobody knows the depth of the financial hole. If I was in charge, I would find out where all the toxic waste is buried and estimate the amount of capital needed to offset the cost of writing it down. In my view, it makes sense to mark the toxic waste to market and to raise capital at the same time.

Norris points out that SWFs could be part of the capital raising solution -- as they have been in the cases of Citigroup Inc. (NYSE: C) and UBS AG (NYSE: UBS). He also suggests two pitfalls of SWFs as a source of capital. First, they are government controlled which could allow the SWFs to use the resulting power over our financial institutions to further their political ends. Second, whenever a new acronym such as SWF emerges in the financial world -- and there have been plenty including Collateralized Debt Obligation (CDO) and Structured Investment Vehicle (SIV) -- Wall Street will find a way to profit from it in the short-term while sticking the long-term costs on someone else.

MAJOR PAPERS:

• The proposal by Citigroup Incorporated (NYSE: C), Bank of America Corporation (NYSE: BAC) and JP Morgan Chase & Co (NYSE: JPM) to shield banks and structured investment vehicles from big losses appears to be losing momentum, the Wall Street Journal reported.
• The Wall Street Journal's "Heard on the Street" reported that though activist investor believes there is nearly $20B in additional shareholder value should Motorola Inc (NYSE: MOT) break up, analysts caution that the company needs to fix underlying problems to maximize the value.

OTHER PAPERS:

• Countrywide Financial (NYSE: CFC) has been subpoenaed by the Illinois attorney general, according to the New York Times.

Bank of America Corporation (NYSE: BAC) announced Monday it closed a $12 billion, enhanced money fund after major clients pulled-out amid losses on complex asset-back securities, including structured investment vehicles, Bloomberg News reported.

The Columbia Strategic Cash Portfolio was closed last week and is being "wound down," Bank of America spokesman Robert Stickler told Bloomberg News. Sticker said the fund's net asset value, which had been $33 billion two weeks ago, was 99.4 cents on the dollar as of Monday.

The proposed Super SIV may end up being considerably smaller than the original outline, as banks and other SIV-owning institutions either write-down or find other ways to dispose of problematic SIV assets, The New York Times reported Monday.

Conceptualized following a request from the U.S. Treasury, the Super SIV is designed to facilitate the orderly sale of high-risk packaged mortgage loans and assets held by SIVs, but not to rescue those SIVs.

As presently configured, beginning in January/February 2008 the Super SIV will lead a coordinated, gradual purchase-and-resale of these assets, which, officials say, will avoid a "mad rush to the door" of SIV asset sales. The latter would further depress prices, and create another round of credit market turmoil, with negative consequences for the U.S. economy. The Super SIV will raise money from financial institutions to fund itself.

The New York Times reports that the market rally last week was due to investor's confidence that the Bush administration is stepping in to bail out the economy. I don't buy this explanation and think that the market moves because of what big investors are doing -- information that does not get into the media. Moreover, based on its track record, I would conclude that the Bush Put -- as I'd call the Times' notion -- is likely to be just as effective as the Mission Accomplished banner he used as a prop in May 2003.

To explain this, here's some recent history. In May 2003 George Bush landed a jet on an aircraft carrier and strutted like a peacock in front of a banner blaring "Mission Accomplished." That was over four years ago and that banner still looks like it's premature. By contrast, during the reign of Fed Chair Alan Greenspan, the market formed the concept of the Greenspan Put -- the execution of Fed policies that limited investor's downside risk -- because he successfully bailed out investors for their excesses.

This week my guess is that the market rallied in response to two moves: Fed Chair Bernanke's comments on flexibility -- hinting at further rate cuts on December 11th -- and Treasury Secretary Paulson's announcement of negotiations with banks to keep some mortgage rates from resetting upwards on some of the 1.5 million nonprime mortgages valued at $331 billion that will reset by the end of 2008. Since Bush seems to be coordinating the responses to the latest economic turmoil, I am elevating the market rescue efforts to the Oval Office -- hence the Bush Put.

It looks like the Super SIV roadshow is about ready to start, with the Bank of America apparently taking the lead.

Left unanswered -- at least for the immediate future -- are compelling questions related to the fund's transparency, effectiveness, and cost.

The Bank of America (NYSE: BAC) announced Monday that it will lead efforts by Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) to convince smaller competitors to help finance an $80 billion bailout of the short-term debt market, Bloomberg News reported Monday, citing two sources with knowledge of the matter.

With the price of Thanksgiving dinner up 11% this year over last, the Fed won't help consumers because it's confident that inflation -- as measured by Personal Consumption Expenditures (PCE) will range between 1% and 2%. Meanwhile, Washington is happy to create lucrative business deals for Wall Street -- in the form of arrangements to manage and keep records of its Structured Investment Vehicle (SIV) bailout.

What is the Fed smoking? I don't know any personal consumption expenditures that are growing at 1% to 2%. The price of oil has quadrupled since January 2001 to $99.29 a barrel, gasoline prices are up 40% since last year, airfares have more than doubled -- a flight from Boston to Florida that cost $300 last year is now $700 -- and the dollar has lost 61% of its value since January 2001. I guess the Fed has decided to define PCE in a way that conveniently confirms its pro-inflation interest rate policy.

Meanwhile, the Treasury Department has backed a Super-SIV plan to bail out banks, such as Citigroup Inc. (NYSE: C) which created the $320 billion SIVs industry and invested the proceeds of SIV-issued commercial paper in now-worthless mortgage backed securities (MBSs).

In August I posted on the danger that subprime mortgages pose to people who invest in money market funds. Today, the New York Times reports that several such funds have invested in commercial paper (CP) issued by Structured Investment Vehicles (SIVs) backed by subprime mortgage-backed securities (MBSs). I think all money market funds should start a public information campaign to let people know if they have the SIV virus and if so, what they're doing to protect their customers from it.

Earlier, I posted on all the new vocabulary words I've learned in the last year thanks to the subprime mortgage meltdown. This $1.3 trillion market consists of mortgages to people who can't afford to repay in many cases. Forty seven percent of the loans were made without documentation of the borrower's income -- these are known as liar loans. The subprime mortgages were packaged as MBSs and among the buyers were SIVs -- off-balance sheet entities that use a bank's good credit rating to issue CP to invest in MBSs.

Thanks to the subprime mortgage meltdown, the CP is not worth as much as before so the money market funds that bought it are now forced to break the $1 per share constant value or put money into the fund to make up for the lost value. So far, analysts say that most SIV securities are trading at 97 to 98 cents on the dollar. But if more SIVs are forced to unwind, the resulting fire sale would put pressure on prices.