There is a bit of trepidation as I sit here at my screen, watching the S&P 500 drop more than 3%, reading about yet another bank "buyout," and especially after skimming through Congress's just-released 110 page $700 billion Emergency Economic Stabilization Act -- Wall Street bailout plan.

Apparently, no on likes it. The bright point of the plan is the two inch margins and the double spacing that make it readable.

As an economist, I am very concerned about the long term consequences of the plan, whether it will train the markets to expect government intervention. Also, the sheer cost is very high -- about $4,600 per working person -- unless, of course, the government is able to make money with it.

Is this just the fore shocks and tremors before the financial earthquake? With all these banks failing, things could get very messy. Is this market setting up for a crash?

This morning, I speculated that Morgan Stanley (NYSE: MS) might reunite with its former parent -- JPMorgan Chase (NYSE: JPM). It looks like I was wrong about that. But the basic idea of finding a merger partner for Morgan Stanley is still alive. The New York Times reports that Wachovia (NYSE: WB) has been in talks with Morgan Stanley about a possible combination.

Morgan Stanley's stock fell another 24% today and Washington Mutual (NYSE: WM), about which I posted this morning, hired Goldman Sachs (NYSE: GS) to find a buyer. So it could be that less than a decade after Congress repealed the Glass-Steagall act -- which prohibited investment and commercial banks from combining -- we will solve our current catastrophic financial problems by reconstituting the very thing that contributed so heavily to the Great Depression.

This looks to me like a desperate move that is only possible because commercial banks were required -- due to their regulations -- to hold more capital than investment banks. The investment banks were vulnerable because they bought such a huge volume of complex securities that nobody now wants to buy. And the decline in the value of these securities is wiping out the slim sliver of capital that they held.

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Holy cow, can it be any slower out there? I'm taking a break from trying to set the all-time record for meetings on a "slow" summah Friday to offer a quick take on a few topics.

Will Lehman Brothers Holdings Inc. (NYSE: LEH) get married over the weekend?

• There hasn't been any price talk on Lehman so even if it happens, it's a bit of a crap shoot. Remember Minyans, Bear Stearns was taken over too.
  
  
• There is no doubt franchise value and a lot of smart people at Lehman. There's also a lot of baggage on their balance sheet. It -- like most of the financials -- is a double-edged sword.

It's officially a trend because it's happened more than three times -- a bad financial report leads to a spike in stock prices. (I posted here and here about this phenomenon with Citigroup (NYSE: C) and Bank of America (NYSE: BAC) respectively). Now, the New York Times reports that five banks lost billions, or saw their profits plunge, but their stock prices rose an average of 12.9% in the wake of those reports.

Why? The conventional wisdom suggests that investors expected them to do much worse and were pleasantly surprised. And this phenomenon is not confined to banks -- this morning, Yahoo (NASDAQ: YHOO), which reported a penny less profit per share than the 10 cents analysts had expected, is up 3% in premarket, reportedly because it did not lower its guidance.

I am not convinced by conventional wisdom about why these stocks are up. My hunch is that there were many traders who sold short the stocks of these companies because they expected them to do worse than they actually did. When reported results beat expectations, investors bought the stocks, perhaps due to bottom fishing. These buyers caused the stocks to rise enough to trigger margin calls for those who were short. The shorts bought to satisfy those margin requirements, causing a buying panic. I wish I had data to test this hypothesis.

MAJOR PAPERS:

• Wachovia Corporation (NYSE: WB) could announce a capital infusion of several billion dollars from outside investors as early as Monday, people familiar with the matter said. While final terms of the deal are still being worked on, the Wall Street Journal reported that the bank is expected to receive between $6B-$7B, in return the investor group would receive shares priced at roughly $23-$24 per share.
• According to people familiar with the matter, the Wall Street Journal reported that Deutsche Bank AG (NYSE: DB) is seeking to sell as much as $20B in debt to a 'collection of investors,' which include private-equity firms.

OTHER PAPERS:

• The Telegraph reported that Liberty Media Corporation (NASDAQ: LCAPA) is said to be considering a bid for Virgin Media Inc's (NASDAQ: VMED) television channels.
• The UK Times wrote that Citigroup Incorporated (NYSE: C) and Merrill Lynch & Co Inc (NYSE: MER) will demoralize Wall Street this week with revelations of write-downs of $15B.

I worked at Wachovia Corporation (NYSE:WB)'s predecessor, First Union, in the heady early years of banking consolidation. My boyfriend at the time worked for the cross-town rival, NationsBank, now Bank of America Corporation (NYSE:BAC). Our bosses were married, coincidentally, so we got lots of peaks into the personalities behind some of the biggest banks in the country. At the time, I was in Loan Syndications, meaning that each month brought a new opportunity to meet & greet the local frontliners in all the world's banks -- and every time a new bank acquisition came across the pike, we had both one fewer contact and instant access into merger scuttlebutt.

Let's just say that, when I read in the Chicago Tribune about the Morgan Stanley report claiming that both Bank of America and Citigroup Inc. (NYSE:C) were leading takeover targets, I said (much like blogger Ticker Sense), what the flip? Hardly. Not only, as Ticker Sense points out, are Bank of America and Citigroup the fourth- and fifth-largest companies in the country, and as a result: entirely too big to be bought out. But, also, it's just not in their corporate personalities. Hugh McColl, longtime CEO of Bank of America and, though he's retired, a manager whose spirit will always be redolent in the corporate decision-making, is a buyer, not a seller. He and his counterparts at Citigroup have been locked in a battle of one-ups-manship to secure the title of biggest bank in the nation for years, and neither would be likely to give up said title for a little (questionable, in the huge conglomerate that would result from any acquisition) value for shareholders.

There's going to be no takeover here, not with Bank of America or Citigroup at the short end of the stick. Maybe the two company's stocks are cheap (Bank of America closed today at $54.56, a decline of 7 cents and only a dollar away from its 52-week high; while Citigroup closed at $50.31, a $0.46 decline, and also about a dollar away from 52-week high), but that says "buying opportunity" to me, not "takeover target."

Want to buy a buyout possibility? Now Wachovia ... that's a possibility.