It may be victory of hope over reason. Merrill Lynch (NYSE: MER) is telling everyone who will listen that it has enough cash to make it though the current crisis and will not have to raise any more.

It might be best for the management at Merrill to say nothing, but it cannot help itself. According to The Wall Street Journal, Merrill's top two financial executives "attempted to assuage concerns that Merrill will have to raise more equity to maintain its strength as its difficult-to-value assets and its exposure to weak counterparties rise."

Merrill has created reserves against future losses, but the firm acts as if it has an ability to look into the future. If the current credit crisis has two hallmarks, they are that Wall Street did not see the problems coming and that, over time, the trouble seems to be getting worse and not better. Merrill not only has to face mortgage-backed securities losses but it also faces troubles with LBO loans and consumer credit derivatives.

Investors are having none of it. Over the last six months, shares in Merrill are down almost 15%, about the same as Morgan Stanley (NYSE:MS) and not nearly as good as the Dow.

Merrill now faces the potential humiliation of not living up to its promise if the tide turns against it later in the year. Shareholders don't like managements to make promises that they cannot keep.

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

U.K. home repossession claims by mortgage lenders increased 16% from a year ago to their highest level since the early 1990s, Bloomberg News reported Friday.

The U.K.'s Ministry of Justice said possession claims, the first step in the foreclosure process, increased to 38,688 in Q1 2008, from 27,530 in Q1 2007, Bloomberg News reported.

Anglo-American housing slump

London-based economist Mark Chandler told BloggingStocks Friday the large foreclosure rise indicates that the air is easing out of the housing balloon, and that the housing correction that began in the United States, is "clearly washing shore in the U.K."

The ever-incisive FT columnist Martin Wolf offers prudent and timely advice concerning the reforms needed to ease credit market doldrums and right the global financial state of things.

One key practice Wolf would like to see addressed is bank / mortgage lender selling of mortgages they originate.

Designers of the practice had good intentions: It was designed to free-up capital so banks / mortgage lenders could have more money available for future homebuyers. A noble intention.

Unfortunately, as tradition reminds us, the road to perdition (and record housing sector slumps) is paved with good intentions. The problem, Wolf notes, is that the originate-and-distribute model encouraged banks / mortgage lenders to originate (in many cases for handsome fees) high-risk, very-poor-credit-quality mortgages with reckless abandon, because originators knew that the loan would be sold, and its status as a performing asset would be entirely someone else's problem. Save the best (mortgages), get rid of the rest.

It's not surprising, Wolf notes, that the originate-and-distribute model became laden with sloppy, irresponsible and even fraudulent loans. Wolf's reform: originators must be required to retain a portion of the equity of securitized loans. Hence, if / when they go bad, the originator loses money too.

Economic Analysis: Wolf's proposed financial / bond market reform is on the mark. If every party, including the originator, has a stake in a mortgage's repayment status, that will lead to higher-quality loans, while at the same time retaining the secondary market's benefit of freeing-up capital for new mortgages.

News that financial services giant Citigroup (NYSE: C) is selling shares of common stock to raise capital is disturbing. According to a report in Bloomberg: "The company announced plans to sell $3 billion of stock to increase capital depleted by writedowns on subprime-related mortgages and bonds."

To dilute investors even more is just plain "Chutzpah." Shareholders over the last year or so have already lost more than 50% on their City shares; there has got to be a better way for the company to increase capital. Instead of diluting investors why not try and unlock some value for shareholders? It's not like the company has no assets. It could spin off the credit cards division, separate domestic and global consumer banking, spin off the capital markets division, and so on. It could generate a lot more than a measly $3 billion, and actually make shareholders happy!

Commenting on the move, as reported by Bloomberg, "Super Analyst" Meredith Whitney, who basically has been correct each step of the way as the banking crisis has worsened, said, "The fact that the company raised such a small amount of capital at this time confounds us. We believe Citi needs to raise an additional $10-$15 billion or sell several hundreds of billions worth of assets in order to truly shore up its capital position.''

It's time for Citi to be broken up, so that investors can finally reap some rewards.

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 4/30/08

The turmoil in the capital markets has led to some great music: In the Hamptons and H-E-D-G-E F-U-N-D from Merle Hazzard and this nice riff on "We Didn't Start the Fire."

I can't find an audio recording of it online, but here are the lyrics to Colorado securities lawyer Phil Feigin song "Churn, Churn, Churn", to be sung to the tune of "Turn, Turn, Turn", courtesy of the Denver Post. I wouldn't expect more music from Mr. Feigin anytime soon. The meltdown in subprime should keep securities lawyers busy for a long time ...

Sell everything, churn, churn, churn,
Who needs a reason? Churn, churn, churn,
Make a loan for every purchase under Heaven.

It looks like European banks have been hit much harder by the subprime crisis than U.S. banks. Last week, UBS (NYSE: UBS) wrote off about $19 billion, and today we have news that Royal Bank of Scotland (NYSE: RBS) suffered an $11.7 billion loss. We haven't seen numbers like that in the U.S. and this may be a story that needs to get more play. The European banking system is in far worse shape than the banks on our side of the Atlantic, and the impact that will have on global growth should not be underestimated.

Keep in mind that nothing like the FDIC or SIPC exists in Europe, so a major bank failure could be catastrophic for consumers. Banks have started tightening credit, and the once red-hot real estate sector has cooled, especially in places like Poland. I have friends who are in the real estate business in Eastern Europe and they say things have really slowed down.

The FBI says that deceptive practices at hedge funds and some banks may have made the subprime disaster worse. According to Reuters, the head of the agency said the bureau's investigation of potential fraud in the U.S. home mortgage industry now encompasses 19 companies in "cases that may have a substantial impact on the marketplace."

While insider trading and accounting fraud may be part of any charges which emerge, one of the biggest single issues may be the sales practices of the firms which sold subprime paper to their clients. The subprime instruments were often presented as having high credit ratings and safe risk profiles. Of course, it didn't work out that way. Another problem may be whether mortgage banks were completely honest in what they told home-buyers about how their loans would work as their interest rates increased over time.

Some of the investigation is a witch hunt. Large banks which took subprime instruments onto their balance sheets had plenty of genius-level analysts who could have examined the products. At most firms, so one skipped that part. Caveat emptor and all that. Individuals who took on home mortgages sold by people who did not want them to read the small print is another matter.

Rumors are that Goldman Sachs (NYSE:GS) and and Morgan Stanley (NYSE:MS) could be targets of the probe. Countrywide (NYSE:CFC) is already under investigation. One news report on the potential scandal said that FBI head man Robert Mueller told a meeting of lawyers "that their corporate clients should come forward and admit any wrongdoing before the FBI or Justice Department become involved.."

That'll be the day.

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

Citigroup (NYSE: C) is expected to post write-downs of as much as $12 billion in first quarter and have a loss of over $3 billion. Merrill Lynch (NYSE: MER) could show write-offs of $5 billion and a loss of $2.7 billion. According to The Times, Merrill "is expected to knock a further 20% from the value of its sub-prime holdings, in spite of the fact that it announced $18 billion of write-downs only three months ago."

The paper also reports that "Deutsche Bank is attempting to offload some of its €35 billion (£28 billion) of toxic debt to a consortium of private-equity firms."

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

The New York Times reports that in 2007, the median family made less -- $60,500 -- than it did in 2000 -- $61,000. Meanwhile, that family's costs have spiked -- oil is up 342%; wheat, milk, and egg prices have doubled or tripled. And the dollar has lost 65% of its purchasing power. But no worries -- hedge funds are making out well. DealBook reports that John Paulson, who famously profited from selling subprime short last year, made $3 billion in 2007. I don't know how much he made in 2000, but I'd bet that he's better off now than he was then.

Newsweek reports that people like Paulson are part of a new Superclass that's prospered in the last seven years. The Superclass is a group of a few thousand government and business people who control most of the world. How many and how much? Newsweek notes: "The top 50 control almost $50 trillion in assets. The heads of the world's biggest corporations are also members; the top 2,000 support perhaps 500 million people, generate almost $30 trillion in sales and have well over $100 trillion in assets."

Thanks to tax cuts passed in 2001, Paulson probably paid a lower tax rate on his $3 billion than the median American paid on his or her $60,500. Specifically, Paulson could have paid 15%, the long-term capital gains rate, on his income from shorting subprime. The median family paid a 25% rate on its income. That capital gains rate was 20% in 1997 so Paulson may have paid $150 million less in taxes thanks to that 15% rate. But the most interesting part is how Paulson profited.

Reuters reports that First Marblehead Corporation (NYSE: FMD) -- a student loan securitizer -- is in deep yogurt and the stock market is not happy, knocking 42% out of its stock. The reason? The Education Resources Institute Inc (TERI), which claims to be the largest not-for-profit guarantor of U.S. private education loans, filed Monday for Chapter 11 bankruptcy protection. Thanks to borrower defaults and credit market problems, its liquidity was "damaged."

People have asked me what would be the next shoe to drop after subprime. The $85 billion student loan market is one where the supposed alchemy of securitization is turning lead into toxic waste rather than gold. Securitization was supposed to eliminate the risk of loss by bundling enough good loans with bad ones so the security would offer attractive returns. While the securitizers got big fees, the losses are turning out to be larger than expected.

Washington Mutual (NYSE: WM) may be rescued from the situation that its low capital base threatens the company's future. According to The Wall Street Journal, "private-equity firm TPG and other investors are close to a deal to invest $5 billion."

Washington Mutual may have to take the money, but it is awful news for the value of the company's shares. There had been rumors that JP Morgan (NYSE: JPM) might buy the company, but those will now end.

Since the bank's current market cap is only $9 billion, the investment represents huge potential dilution. The company's shares now trade at just over $10. On a straight dollar-for-dollar basis, the new capital would take the share price below $7, a 52-week low. Even if some of the money comes in as convertible preferred, the company's shareholders are facing a capital table which will push shares down.

The news is another example of investors losing three quarters of their money in a financial company due to the subprime crisis and then losing more when a private equity company or sovereign fund offers new capital. It is better than Chapter 11 though.

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

Given the headlines that have been streaming across every media outlet, most people wouldn't guess that real estate investment trusts (REITs) were relatively strong performers for the first quarter of 2008.

But that's exactly what happened. According (subscription required) to the Wall Street Journal, "a Dow Jones index of U.S. equity REITs posted a 1.4% gain in total return for quarter, out pacing the 9.4% decline in the Standard & Poor's 500-stock index."

Self-storage REITs were up 20% for the quarter. Huh? Who would have thought that self-storage would get hot!

The point is that it is impossible to beat the market based on following the news. Everyone knew real estate was going to be lousy -- and it was. But markets are a discounting mechanism, and the stocks had already been sold off to reflect the predicted weakness.

What will REITs do in the second quarter? I couldn't tell you. But for what it's worth, Ben Stein thinks they're a buy, telling investors in a speech that "I'm buying all [the REIT units] I can get my little paws on. These are God's gift to retirees."

The troubles never end for Countrywide (NYSE:CFC), but that may be its own fault. According to The Wall Street Journal: "A federal judge has authorized an in-depth probe of Countrywide Financial Corp.'s mortgage-processing systems by bankruptcy investigators hunting for evidence that the big mortgage lender has systematically abused borrowers."

Who knows? Maybe Bank of America (NYSE:BAC) will still walk away from its deal to buy the mortgage company.

Among the charges is that Countrywide got people into mortgages and pumped up fees as customers made payments late. The court is concerned that the "fees" were no accident.

Similar charges keep jumping up as the world learns more about how Countrywide was run. As the old saying goes, where there is smoke there is fire. The number and depth of concerns about how the company made loans and handled customers appears to increase by the day.

The top executives at CFC are getting rich packages as the buyout by Bank of America continues. But, even the bank only has so much patience if the legal bills keep piling up.

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

For the second time in four months, the International Monetary Fund has cut its 2008 global growth forecast, citing the worst financial crisis in the United States since the Great Depression of the 1930s.

IMF now expects the global economy to grow 3.7% in 2008, down from its earlier forecast of 4.1% growth, Bloomberg News reported, citing an IMF document it obtained at the meeting of Southeast Asian deputy finance ministers and central bankers in Vietnam. The IMF also said there's a 25% chance global growth will drop below 3% in 2008 and 2009.

In January 2008, the IMF lowered its forecast for global economic growth this year to 4.1%, the lowest since 2003, from 4.4% predicted in October 2007. At that time the IMF said last year's increase in credit costs resulting from defaults on mortgages aimed at borrowers with poor credit histories was hurting the rest of the economy.

The Oregonian has received a copy of an internal memo from JPMorgan Chase & Co. (NYSE: JPM) titled "Zippy Cheats & Tricks", providing the company's employees with advice that amounts to an endorsement of mortgage fraud. Zippy is Chase's in-house automated loan underwriting system.

Consumerist has posted the memo on its site, and the details are indicative of serious problems at the company. Among the tips:

• Include all compensation under "base income." Lump in tips, bonuses etc. with base income, as that amount is favored by the software.
• Do not mention gift funds -- include them as though they were earned income.
• If all else fails, lie and add $500 to the applicant's income "to see if you can get the findings you want."