The SEC has been accused of being flat-footed on the issue of short selling. The impression among the media and some politicians is that the agency has failed its charter to be the primary watchdog over markets on a number of occasions. John McCain even said he would fire Christopher Cox, the SEC chairman.

Adding to the disdain is a report from inside the SEC itself issued by the agency's monitor of internal controls. According to The Wall Street Journal (subscription required), "Inspector General David Kotz said it is 'undisputable' that the SEC 'failed to carry out its mission in its oversight of Bear Stearns.'" Kotz says the SEC was aware of the threats posed by subprime mortgages and did nothing.

The news adds to the perception that if the federal government had been on top of the credit crisis beginning in early 2007, a number of large banks and brokerage firms would not have failed or watched their shares lose 80% of their value. Based on this point of view, the government is liable for hundreds of billion of dollars loses suffered by common shareholders and bond holders.

Private enterprises rarely have any success suing government agencies. in many ways that is a practical way to keep the courts from being overwhelmed by people with grievances against federal authorities. But, the inspector general's comments do say that investors in the firms which failed were not fools. They simply never had the benefit of assistance from the one agency which should have protected them.

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

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.

I've put together a good-sized Enron memorabilia collection, inspired by the affordability. I was able to buy an Enron lunch bag on eBay for less than the cost of a similar nonbranded product at Wal-Mart.

The collapses of Lehman Bros. and Bear Stearns aren't anywhere near as interesting but the headlines have attracted a swarm of eBay listings. According to The New York Times, "When a big Wall Street firm goes belly up, one bet you can take to the bank is that memorabilia will be offered for auction on eBay within hours. "

If you're looking to support a charity instead of an opportunist -- or burned employee who, having lost his 401(k) grabbed a stack of mugs on his way out the door -- one seller sold a piece of toast with the initials "BS" and "LB" branded on each side. Proceeds benefit the Children's Diabetes Foundation in Denver. The price? A mere $15.50. A piece of toast that offers the ticker symbols of companies about to collapse would likely be worth far more.

As an investment, I don't think Lehman and Bear memorabilia are compelling: collectibles from the Enron and Worldcom blowups do not appear to have appreciated in value.

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.

Like Lehman (NYSE: LEH) before it, Merrill Lynch (NYSE: MER) is becoming a short-seller's dream. In the last five trading days, the stock has gone from almost $29 to under $17 on tremendous volume.

According to Reuters, "Looming large among investors' worries about Merrill are mortgage-backed securities and other structured debt held at two of its banking subsidiaries -- Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co."

The terrible trouble for Merrill and Lehman is that no one knows how badly their balance sheets have been damaged, not even their managements. As credit markets fluctuate and housing prices fall, the value of many financial instruments changes every day.

Bear Stearns was scuttled to a large extent because its large customers pulled out capital. Rumors will cause that.

With the rumors around Merrill, and the short-sellers' ability to fuel the fire, Merrill may be in for a awful week.

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

Hank Paulson is keenly aware that his Goldman Sachs Group (NYSE: GS) and Treasury predecessor, Robert Rubin, helped save the market by encouraging the then-head of the New York Fed to force Wall Street leaders to team up to save Long-Term Capital Management's collapse from taking down the financial markets. Just as George W. Bush needed to recap Iraq, so now does Hank Paulson need to recap that famous meeting in lower Manhattan.

Bloomberg News reports that the meeting -- which took place yesterday afternoon -- involved a rogues gallery of Wall Street executives coupled with Paulson and New York Fed president Tim Geithner. The message these regulators delivered was reportedly a simple one: "You need to solve your own problems, and we're not going to provide any more capital." But Wall Street -- as represented by the likes of "Citigroup, Inc. (NYSE: C)'s Vikram Pandit, JPMorgan Chase (NYSE: JPM) 's Jamie Dimon, Morgan Stanley (NYSE: MS)'s John Mack, Goldman's Lloyd Blankfein, and Merrill Lynch & Co., Inc.'s (NYSE: MER) John Thain" -- are convinced that the Fed will blink when it comes to the 158 year old Lehman Brothers Holdings (NYSE: LEH).

Bank of America (NYSE: BAC) reportedly wants to put in a bid for Lehman contingent on getting government help -- such as the $29 billion JPMorgan got in its Bear Stearns acquisition and its nationalization of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). After these two precedents, Paulson now wants to reverse himself. He says Lehman is different because people have known it was in trouble for a long time and it can access the Fed's discount window. But I think this could just be a little show for the President who is worried about how this will look to history. He may not realize that he has already opened the Pandora's Box of moral hazard and can't shut it now.

It now appears almost certain that the federal government will takeover Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The amount of money the Treasury will have to put into the companies to improve their balance sheets will probably wipe out common shareholders.

The news may foreshadow what will happen to Lehman Brothers (NYSE: LEH) if its gets into more trouble The value of its commercial loan portfolio and mortgage-back securities is bound to fall as the real estate market gets worse.

Several outside investors, including Japanese broker Nomura and the Korea Development Bank, may pump money into Lehman. It is not good news that no one has pulled the trigger on putting up cash. All of the interested parties are probably waiting for Lehman's next quarterly earnings report. If the numbers are bad the value of Lehman's stock, which has gone from a 52-week high almost $68 to $16, could fall further.

The lesson from Freddie and Fannie (and, to some extent, Bear Stearns) is that the Fed and Treasury do not care about common shareholders. They get to go down with the ship.

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

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.

Bloomberg News reports that Wall Street layoffs are putting blood on the streets. But those Wall Street vets have turned those layoffs into new careers -- one Harvard economics grad who formerly worked for Bear Stearns has started a business making cupcakes. That's because, as Bloomberg reports, Michael Maloney, who recruits finance professionals for Maloney Inc. in New York, said, "The job market is in the worst, most chaotic state I've ever seen it in fixed income. I've been doing this for over 30 years and I've never seen anything like this."

The statistics Bloomberg cites are stunning. 76,670 investment jobs "in the Americas" have gone up in smoke "following the global credit crunch that started a year ago." And 33,300 finance jobs in New York City, or "7.1% of the 2007 peak, will be cut by June 2009." And those who lose their jobs will be giving up big money. Wall Street workers averaged $399,360 in 2007 -- six times the $62,390 for New York City jobs outside the securities industry.

So the tough are turning to making cupcakes. Jessica Walter, who studied economics at Harvard, was vice president in credit strategy at Bear Stearns. Bloomberg quotes Walter as saying, "I want to teach kids to cook. The goal is to have this be my full-time job and make enough to live.'' To that end, she founded Cupcake Kids! in New York to provide birthday parties and cooking classes for children.

Wall Street has a habit of riding its booms a bit too long. And that leads to collapse, layoffs, and hand wringing about the future. But it looks like Wall Street is already moving forward. And that means exporting its future by taking its finance franchise to cash rich countries and out of the canyons of Wall Street.

Wall Street's boom and bust cycles tend to eclipse a decade. In the 1980s, junk-bond fueled takeovers created massive amounts of wealth -- and also led to the collapse of junk-bond issuer Drexel Burnham. Wall Street licked its wounds for a few years and by the mid-1990s it had reinvented itself as the headquarters for Internet initial public offerings. That bubble burst in 2000. Then the Fed cut rates to 1% and Wall Street reemerged as a packager of mortgages -- along with servicing hedge funds and private equity moguls.

That all ended last August and the collapse of that bubble led to the demise of Bear Stearns and Countrywide and the loss of about $8 trillion worth of wealth. The New York Times reports that the latest collapse has cost 80,000 finance jobs as well. But Wall Street is already mapping out its future by following the money. And the Times pinpoints where Wall Street thinks that money resides -- based on the growth in the number of Wall Street people moving to various global money centers.

Rumors have swirled about the rapid collapse of Bear Stearns, with a lot of people -- even some normally credible commentators -- absolutely convinced that the company was a victim of a bear raid and naked short selling, and malicious rumor mongering that led to a run on the bank, sealing the bank's fate.

An interesting piece from Bloomberg discusses the suspicious options trading in the stock: on March 11th, someone bought $1.7 million worth of put options, effectively betting that shares of Bear Stearns would decline by nearly 50%. Bloomberg reports that "options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million."

Interesting. But isn't it also possible that the puts were purchased by someone with insider information about the company's disastrous financial position? Must we assume that the only person who would be willing to bet big on Bear's collapse was a malicious short seller who was spreading rumors like Perez Hilton, working overtime to assure a run on the bank? It just seems a little melodramatic. It's not even James Bond -- more like Mack Bolan.

Before we feel to bad for Bear Stearns -- and record it in the history books as a victim of an outside invasion -- it's important to keep in mind what allowed rumor mongers to destroy it, if indeed they did: the company had no credibility, a result of its long insistence that everything was fine.

Bear Stearns was a company that treated its shareholders with scorn, never leveled on the company's true financial condition, and didn't even bother to disclose that its bridge-playing, allegedly marijuana-smoking CEO was seriously ill in the hospital while the credit crisis raged on.

My brother William Cohan's Fortune cover story on Bear Stearns' former CEO Jimmy Cayne has many fascinating tales. (Fortune and BloggingStocks share the same parent -- Time Warner (NYSE: TWX)). I found three to be most interesting.

• Bear was brought down by Fidelity and Federated Investors - Fortune argues that Bear depended on the market for 'overnight repos' -- loans of a one-day term collateralized by securities -- for $50 billion of its working capital. Bear used 71% of its mortgages as its collateral and according to Fortune, "Bear's reliance on overnight Rep effectively gave the overnight lenders -- such as Fidelity and Federated Investors -- a vote on the firm's viability every night. And during that fateful week in mid-March, those overnight lenders voted a collective no. The result? Bear Stearns did not have enough cash on hand to meet customers' demands during the run on the bank."
• Cayne nearly died of sepsis 11 months ago - The article begins, "In the early morning hours last Sept. 11, a black Town Car pulled up to the entrance of New York-Presbyterian Hospital in Manhattan. Inside the sedan Jimmy Cayne, the CEO of Bear Stearns, was close to death."
• Ace Greenberg planned to ask Barbara Walters to marry him the day before she wed Merv Adelson - Fortune says that Bear's Ace Greenberg told Cayne that he was was dating Walters and was planning to marry her. According to Fortune Greenberg told Cayne, 'I've decided I'm going to marry Barbara Walters.' The very next day in the papers she's engaged to Merv Adelson."

For the full story, read the article.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Time Warner securities.

The Wall Street Journal (subscription required) has obtained a draft version of the SEC's report on bond-rating firms and their role in the credit bubble, and some of the stuff is pretty scary.

In one e-mail, a staffer at Standard & Poor's, which is own by McGraw-Hill (NYSE: MHP) told another that "we rate every deal," and that "it could be structured by cows and we would rate it."

Another wrote that "rating agencies continue to create" an "even bigger monster -- the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters. ;O)"

Yes -- complete with the smiley face. If this seems reminiscent of disgraced analyst Henry Blodget's e-mails bashing stocks he was publicly pumping during the dot-com bubble, that's because it's exactly the same. The lesson here, once again, is this: e-mails ever really get deleted permanently and, if you're being shady or doing something unethical, make a phone call, talk with the person in a dark alley, or send them a letter that they can promptly discard. Don't send an e-mail!

Of course, S&P's investment-grade ratings on CDOs stuffed with dodgy loans turned out to be wildly optimistic, and the house of cards has done more than falter -- it's brought down Bear Stearns and wreaked havoc on the economy.