BusinessWeek reports that Wall Street has its eye on a new pot of cash -- your pension. And it's a mighty big pot -- $2.3 trillion. But Wall Street is not looking at the entire pension industry, just a $500 billion portion known as "frozen plans" that are closed to new employees and whose benefits are capped. McKinsey forecasts that frozen plans will triple to a hefty $1.5 trillion by 2013.

As usual, Wall Street's plan to buy these frozen pensions will line its own pockets and it will help companies as well. For example, if Wall Street charged a 2% management fee, that alone would generate $30 billion in revenues by 2013 if it bought all the frozen plans, but that fee income is probably the tip of the iceberg.

Companies are eager to dump their frozen pension plans. Why? These limping plans weigh down corporate balance sheet and new accounting rules will require companies to mark the value of their pension assets to market each quarter. In a down market, that could wipe out a company's operating profits.

Reuters reports that Merrill Lynch (NYSE: MER) is taking an enormous $5.7 billion write-down on losses from mortgage-backed securities (MBSs) and plans to raise $8.5 billion.

The biggest shocker was, as Reuters reports, that Merrill signed a contract with Singapore's Temasek, a sovereign wealth fund, that requires Merrill to pay $2.5 billion under terms of a previous stock sale to Temasek, along with $2.4 billion in required dividends to preferred shareholders. That's because under its previous deal, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors. Temasek has agreed to purchase $3.4 billion -- or 28% of the new offering. In other words, Merrill is paying an extremely high price for its capital.

The second shocker was how much of a write-down Merrill is taking on its portfolio of collateralized debt obligations (CDOs). Private equity fund Lone Star is paying 22 cents on the dollar, or $6.7 billion for CDOs with a stated book value of $30.6 billion. At that rate, the holders of $2 trillion worth of CDOs outstanding earlier this year would need to take a $1.56 trillion haircut if they sold all the CDOs. And I don't think they have nearly enough capital to be able to afford that.

The latest balance sheet of the Federal Reserve makes me wonder whether it's solvent. That's because its balance sheet has clearly deteriorated in the last year. And with $40 billion in capital, that deterioration could take a big bite out of the Fed's capital.

Unfortunately, I do not know enough about how the Fed gets its capital or how it accounts for the value of its assets and liabilities to be able to do more than raise questions. But here are three things that concern me:

• Declining asset quality. The total value of the U.S. Treasury securities on the Fed's balance sheet declined by $312 billion between July 2007 and this July -- a 43% drop in this highest quality asset.
• Increase in shakier assets. During this same period, the balance in Term Auction Facilities -- the credit line that investment banks are using to get their shakier assets -- such as Collateralized Debt Obligations (CDOs) off their balance sheets --increased from $0 to $150 billion. Another $29 billion in assets come from Maiden Lane, LLC -- the entity created for the Fed to take on the toxic waste that sank Bear Stearns.
• High leverage. While the Fed has more capital backing up its assets than the typical investment bank -- which holds $1 of capital for every $32 in assets -- the Fed is still highly leveraged -- with only $1 of capital for every $23 of assets -- it borrows the rest. Put another way, if the Fed was forced to account for its balance sheet on a mark-to-market basis, a mere 4.5% decline in the value of the Fed's assets would wipe out its capital.

These observations raise questions in my mind:

Bloomberg News reports that Lehman Brothers Holdings (NYSE: LEH) wants to sell $4 billion in equity. But it already raised $6 billion so why does it need more? It should be no surprise -- but thanks to a chorus of statements by financial leaders that "the worst is over" -- including Lehman's CEO Richard Fuld, Jamie Dimon, Hank Paulson, and Barton Biggs some are surprised that there are still problems.

Since the crisis began -- last August when the Fed began cutting rates from 5.25% to 2% -- banks have been trying to reduce their ratio of debt to equity below the hugely risky 32:1. But it's hard when they hold $500 billion worth of Level 3 assets -- which don't trade and therefore have no objectively set market value. To maintain or improve their capital ratios, banks have been writing down the value of the securities on their books -- $276 billion worth so far -- and simultaneously raising capital. Citigroup (NYSE: C) has raised the most -- $44 billion.

S&P downgraded Lehman, Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) saying they may disclose more write-downs for devalued assets. And hedge fund manager David Einhorn -- who's short Lehman -- got into a verbal debate with Lehman CFO Erin Callan arguing that Lehman had failed to disclose $6 billion worth of such Level 3 assets -- known as Collateralized Debt Obligations (CDOs) and it needed to raise capital. Today's announcement suggests that Einhorn was right.

Just because executives act like cheerleaders, it doesn't mean investors should take them at their word.

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 the other securities mentioned

The New York Times reported a blockbuster revelation from yesterday's Congressional testimony on the JPMorgan Chase & Co. (NYSE: JPM) acquisition of The Bear Stearns Companies (NYSE: BSC). It turns out that the religious right and government bailouts go hand in hand -- that's because Treasury Secretary Hank Paulson decided that he would not put $30 billion worth of taxpayer money at risk unless JPMorgan paid a really low price for Bear.

The reason? Moral hazard. Specifically, Paulson wanted to use Bear as an example that would scare all the other banks that borrowed $32 for every dollar of equity to buy Collateralized Debt Obligations (CDOs) and other difficult -to-value securities. Paulson wanted to wipe out Bear shareholders so they would be reluctant to seek government help if they got into trouble.

And another thing. Alan Schwartz, Bear's CEO, claims to have misunderstood and thought it was a 28-day loan granted on Friday 14th. This would have given him a month to straighten things out. But he later learned that the loan lasted only for the weekend. And he would need to file for bankruptcy or accept the deal that Paulson was offering. Faced with two terrible choices, Schwartz took the Paulson deal.

How much will taxpayers lose due to Paulson's moral qualms? Was this really necessary? Wouldn't the 28-day loan have avoided this?

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 the securities mentioned.