The New York Times reports that S&P held an investment conference yesterday at which leading bankers complained about a rule that requires them to report accurately the value of securities on their books that nobody else wants to own. They complain because this reporting has resulted in $300 billion of losses so far. That cuts into bank earnings and their own bonuses.

Banks naturally don't like having to mark down assets simply because the markets have frozen up. Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup Inc. (NYSE: C), suggested that some assets could be marked as if they would be held until they matured. But this ignores economic reality. If nobody wants to buy an asset, then it has no price. Therefore, for those free marketeers out on Wall Street, the assets have no value at all.

So, as I posted, banks are left trying to make up a value for the assets using computer models on complex spreadsheets. Not surprisingly, different banks use different spreadsheets to value the same kinds of assets. One of the conference participants suggested that regulators should allow banks to get together and compare spreadsheets so they can become more consistent.

A front page story on Edwards backing Obama in today's Financial Times had an interesting unattributed comment near the end. In it, a source suggested that a deal could be in the works to make Hillary Clinton give up her quest for the Holy Grail -- err Democratic nomination.

The final paragraph in the print edition (this paragraph actually didn't make it into the online edition of the story) quotes one of senator Clinton's Wall Street backers as saying that the "'ultimate peace pact' with Obama could involve some sort of support from him to pay off her debts, which are estimated at $20m or more."

I am not sure how Obama would help Clinton pay off her campaign debts. Would he divert money he's raised from his supporters to Clinton? I don't think Obama supporters would be too happy about that. Or would he start a new round of fund raising with the explicit understanding that the money would go to Clinton? It's no surprise really that someone from Wall Street would be suggesting such a deal. I don't know whether this kind of thing has been done before but my hunch is that it has.

Merrill Lynch (NYSE: MER) is worried that its analysts are going too easy on the companies that they cover. Perhaps they have become too friendly with managements or spent too many nights out on the town with executives trying to get clues about how things are going.

To counter any of that in addition to balancing bad analysis by its researchers, Merrill is insisting that each researcher rate 20% of the stocks in his coverage universe as "sell", or as the brokerage calls it "underperform".

Perhaps Merrill does not trust its army of analysts or at least it sounds that way. According to The Wall Street Journal, "Merrill also will require analysts to publish the reason for their recommendation and a price target for every stock." It goes without saying that a stock researcher who does not do that is not much of a stock researcher at all.

The move by Merrill is a tacit admission that its analysts have been giving bad advice to clients. Why change a system which is based on fair and reasonable ratings?

The only reason for the alteration is that clients have been misled.

Douglas A. McIntyre is an editor at 247wallst.com and author of Ten Stocks Under $10.

Citigroup Inc. (NYSE: C) is unmanageable. That's my conclusion after trying to understand its latest quarterly report. The concept behind this 100-armed corporate octopus is that people like to buy all their financial services in one place and therefore it makes sense to be able to sell them a full line of products from stocks to bank accounts. But I suspect that customers don't want all their financial eggs in one basket, so the concept is fatally flawed.

Moreover, its financial performance reveals that Citi is a complex mess whose many different businesses do not diversify its earnings streams. According to its quarterly report, Citi lost $5.1 billion. Most of the losses came from its Securities and Banking (-$6.4 billion), Alternative Investments (-$509 million), and U.S. Consumer (-$476 million) units. Two bright spots were $1.3 billion in earnings from International Consumer and $732 million in Transaction Services.

But wait, there's more in its huge, risky portfolio. Citi has $40 trillion in derivatives -- enormous bets on interest rates and currencies. And it has $1.2 trillion worth of off-balance sheet entities (remember Enron?). Nobody really knows what these are worth or how much they'll cost. And that doesn't even get us to the $262 billion in Level 3 assets -- illiquid, difficult-to-value securities -- which are 2.1 times Citi's $128 billion in capital. That's a pretty thin cushion for future write-downs.

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.

UBS (NYSE:UBS) is making a bid to increase the unemployment rate all on its own. The bank will lay-off 5,500 people, mostly investment bankers. It will also sell a package of $15 billion portfolio of subprime mortgages to Blackrock (NYSE:BLK). According to Reuters,"UBS cautioned that conditions in financial markets were still tough and declined to offer any results forecast."

The UBS comments about what happens next are a coded message that layoffs at the firm may not be over. UBS has suffered as much or more from subprime write-downs as any bank in the US or abroad.

The news is especially bad for people employed at brokerages and big banks. A continuing spike in mortgage defaults could cause more difficulty in the pool of financial instruments created around the market. That, in turn, could cause more write-offs at large banks triggering the need to raise capital and cut costs.

Tens of thousands of people have been fired on Wall Street already. The news out of UBS shows that the process is far from over.

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

The New York Times reports that the market was up 190 points yesterday and has risen 11% in the last few weeks. Not only that, but AP says that the jobless rate fell to 5% in April -- better than the expected 5.2% rise. So does this mean that happy days are here again? No. And you should use today's rally to take money off the table if you have any.

Why? Things are not good for the consumer who accounts for 70% of economic growth. My mailman stopped me yesterday after my run and gave me a grim look. He is very friendly and talks to many people on his delivery route and elsewhere. And he told me that with gasoline prices so high, many people are canceling their vacations so they can pay their bills.

As I posted here, gasoline prices are gobbling up a bigger and bigger piece of the median family's income. And USA Today reports that worldwide food prices have skyrocketed 45% -- sending consumers on a recession diet. Businesses are having trouble getting money from banks because the banks still have $500 billion in hard-to-value assets which requires them to hold onto every scrap of capital they can get.

Auction-rate securities, which traded regularly since 1985 and were sold to many investors as "cash equivalents", hit a pocket which no one expected. The banks which ran the auctions shut them down because they did not want any of the underlying securities on their balance sheets. Now companies and individuals who bought the paper cannot readily get their money back.

Ultra-aggressive NY State Attorney General Andrew Cuomo, clearly hoping to become the state's governor one day, has launched a huge probe into why the banks killed the market. According to The Wall Street Journal, "Mr. Cuomo's office sent subpoenas to 18 institutions on Monday and Tuesday seeking information on their auction-rate-securities." Firms including Merrill Lynch (NYSE:MER) and Citigroup (NYSE:C) have been asked for documents.

Two legal issues face big banks and brokerages involved in the auction-rate market. The first is whether they had an obligation to keep a market open which had operated successfully for over two decades. They fundamentally left their clients holding the bag.

The second potential charge is much more significant. Did brokerage houses represent to clients that the paper was virtually the same as cash, redeemable at any time? If so, buyers of the securities may make a series of claims involving fraud. Several suits have already been filed.

In a market which was over $300 billion dollars, the potential liabilities are substantial. It is just the kind of case than can get a guy elected to higher office.

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

There's nothing quite like the earnings game on Wall Street. And two big banks -- JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) both played it very well. Despite falling earnings, investors are celebrating. And that's because JPMorgan and Wells both beat analysts' expectations.

Bloomberg News reports that Wells earned 11% less than last year -- $2 billion, or 60 cents per share -- 5.3% more than the 57 cents that analysts had expected. Wells took in $334 million from its stake in Visa Inc. (NYSE: V) IPO, but it also benefited from a tight credit culture and an aggressive sales force. Nevertheless, its charge-offs for bad credit card and automobile loans were up 26% -- a sign of trouble in consumer loan land.

Meanwhile, AP reports that JPMorgan beat analysts' expectations by 6.3% despite a 50% decline in its net income. Specifically, JPMorgan profit fell in the first quarter to $2.37 billion after it took a provision of $5.1 billion to strengthen its reserves by $2.5 billion and account for $2.6 billion in losses in its loan portfolio. JPMorgan made 68 cents per share compared with $4.79 billion, or $1.34 per share, a year earlier. That was 4 cents more than the 64 cents that analysts expected.

As investors await today's start of earnings season, they should remember that Wall Street's equity analysts blew it in the fourth quarter, overestimating profit by 33.5 percentage points, the biggest miss ever, according to Bloomberg News.

"Merrill Lynch & Co.(NYSE: MER), Bank of America Corp. (NYSE: BAC) and the rest of the securities industry aren't losing credibility because of anything sinister," the story says. "The problem is they didn't get their math right after credit markets froze nine months ago."

I am not terribly optimistic that analysts have improved much in the first quarter. Earnings estimates are probably still way too high. Many, many companies are going to miss their earnings estimates. This will erode Wall Street's credibility even further.

Richard Weiss of City National Bank told Bloomberg that first quarter results will be a "big wake-up" call for some analysts. Some may lose their six- and seven-figure jobs because of it.

The lesson here is for investors to do their own homework. Anyone who doesn't have the time or motivation to do it should either hire an adviser or buy index funds.

These days, you can't take Wall Street's word for anything.

James Cayne added insult to injury has he sold his last $61 million in stock. He got slight ly more than $10 a share. When the stock traded above $170 lost year, he was a bit better off. According to MarketWatch, "Cayne and his wife sold two large blocks of more than 5.6 million Bear Stearns shares."

Cayne will take a beating for cashing out while many Bear Stearns (NYSE:BSC) employees lose their jobs in a takeover by JP Morgan (NYSE:JPM). He had been kicked out of the CEO job by his board. While he has much responsibility for the collapse of the firm, he has lost most of his fortune, and is in his seventies.

Cayne took what he could before the deal faces potential reviews by Congress. The transaction could still fall apart and take the stock to zero. Cayne will be long gone then, back to playing bridge, golfing, and allegedly smoking pot.

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

Too often Wall Street snaps that the federal government should leave it alone. Then, once things go wrong, these fiscal conservatives transform themselves into New Deal Democrats and applaud moves like the Bear Stearns Cos. (NYSE: BSC) bailout.

Now comes word from Washington that the investment banks better prepare themselves for greater government scrutiny. The question is how much. These dealmakers are now crying that they want the government's help without any additional oversight. That seems like a non-starter and even the Bush administration recognizes the need for greater oversight of Wall Street.

Speaking in Washington today, Treasury Secretary Henry Paulson said Wall Street firms will need to provide additional information about their financial conditions if they want to borrow money from the Federal Reserve. The former Goldman Sachs Group Inc. (NYSE: GS) CEO stopped short of calling for investment banks to face the same regulations as commercial banks.

"Mr. Paulson acknowledged that the Fed's decision to lend to investment banks creates a contradiction between how commercial and investment banks are being treated, and he implied that investment banks ought to be subject to the 'same type of regulation,'" The New York Times said. "But moments later, he said: 'Recent market conditions are an exception from the norm. At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil.'"

Looks like the adage of a conservative being a liberal who got mugged needs to be revised.

In the 1930s and 1970s stocks stayed down for a decade. That is happening to the US markets again now. According to The Wall Street Journal, "The current market turmoil suggests that we may be in another lost decade." At this point, the S&P 500 is below where it was in 1999.

The stock market is now under-performing investments such as bonds and even real estate, and that adds more fuel to a potential deep recession.

As prices continue to rise rapidly for items like gas and food, the consumer might have been able to turn to his home for equity. Now that home prices are down 15% to 20% in some markets, that does not work anymore. The other pocket in the consumer's pants was the investments he had in mutual funds, stocks, and his IRA. His gains in those instruments is clearly going up in smoke.

Consumer spending has driven GDP growth for years now. The consumer has less to spend now, and that could go to even less than that.

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

Some Wall Street analysts believe that most write-offs for subprime mortgages, LBO loans, and other credit paper are behind the big banks and brokerages. Goldman Sachs (NYSE:GS) analysts think otherwise.

According to Bloomberg: "Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed."

If the analysis is true, it will cause two huge problems in the financial markets. The first is that banks and brokerages will probably have to raise more money. This capital may be hard to come by. Sovereign funds and private equity firms appear to have lost their appetites for investing in US financial companies while their stocks keep dropping. That leaves the Fed to provide more capital, which will have to come from someplace. That someplace is the tax base especially individual taxpayers.

The other byproduct of more losses is that banks will cut lending to customers even further instead of risking capital on consumer credit, auto loans, mortgages, and small business loans.

In other words, borrowing a dollar for a cup of coffee may be out of the question.

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

DealBook reports that Wall Street firms are expected to dismiss 20,000 more workers in the next two years. That's based on plummeting profit expectations for these brokerages.

The earnings forecast for Wall Street is gloomy. New York's Independent Budget Office (IBO) estimated that Wall Street's profits for 2007 will sink by 85% to the lowest level since 1994. When the final totals are in, profits for 2007 are expected to be $3.2 billion, down from $20.9 billion in 2006. Perhaps optimistically, IBO expects a quick and dramatic recovery -- with Wall Street's profits expected to spike 106%in 2008 to $6.6 billion and rise 85% more in 2009 to $12.2 billion.

I hope for New York's sake that IBO is right about 2008 and 2009. IBO expects bulk of Wall Street's job cuts -- 12,600 -- to occur in 2008 followed by 7,600 cuts in 2009. The IBO's analysis does not take into account layoffs at The Bear Stearns Companies (NYSE: BSC) , whose work force of 14,000 includes about 8,000 employees in New York -- CNBC reported that JPMorgan Chase & Co. (NYSE: JPM) expects to cut 50% of Bear's total work force.