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.

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.

As investors, we've been bombarded over the past couple of months with negative news coming from Wall Street banks that either underwrote, invested in, or had clients who invested in bad mortgages or some derivative of them. While these firms have written down billions in assets on their balance sheets, investors like Joe Lewis, the Australian billionaire who put $1 billion into Bear Stearns (NYSE: BSC) and promptly saw his investment drop almost 100%, have been left holding the bag.

Bloomberg is out this morning with an article which details some of the fallout from this process. According to Bloomberg, after the Internet bubble burst, 39,800 jobs at big banking firms were eliminated during the same period. The number climbed to 90,000 in the next two years, according to the Securities Industry and Financial Markets Association.

While not everyone cries over millionaire bankers losing their jobs, there is certainly fallout that hurts everyone dependent on a healthy economy. One recruiter interviewed by Bloomberg predicted that the total headcount reduction could be more than 100,000 in a few years. Lawyers, realtors, and mortgage brokers are feeling the heat.

According to Bloomberg, the biggest cutters have been:

• Citigroup 6,200
• Lehman Brothers 4,990
• Bank of America 3,650
  

I tend to think that from a cycle point of view, Wall Street cuts harshly only to rehire when things pick up.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

Morgan Stanley (NYSE: MS) reported earnings this morning that while dropped significantly, still beat Wall Streett's expectations. Citing strong equity sales and trading profits, the large investment bank impressed analysts with better-than-expected performance. Net revenues dropped 17% but things weren't quite as bad as analysts were forecasting.

In spite of fourth quarter results deemed "embarassing" by CEO John Mack, MS joins the ranks of Goldman Sachs (NYSE: GS) and Lehman Brothers (NYSE: LEH), two investment banks whose relatively benign performance in the face of very strong headwinds, has helped allay some concerns about a liquidity traffic jam for financial firms.

Bloomberg ran a story on Morgan's performance here. The same story quoted an asset manager as saying "Any business that Bear Stearns had probably has gone to someone else." At least that's some good news for the walking wounded.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

Some fairly simple math indicates that it wouldn't take much to wipe out the capital of the banks and hedge funds. And this simple math helps explain why the popular delusion that 'liquidity' = 'capital' is so dangerous. That mental equation works just as easily to create the illusion of prosperity as it does to eliminate the capital that is supposed to stand as bulwark against bad lending decisions.

That's because investment banks and hedge funds combined have borrowed $10.9 trillion on a sushi-thin slice of equity of $340 billion. Newsweek reports that on average, the ratio of borrowed money to underlying capital for investment banks and hedge funds is about 32-1. It reports that in 2006, investment banks had an estimated $280 billion in capital. At 32-1, the investment banks are borrowing $8.96 trillion. Meanwhile, hedge funds manage $1.9 trillion worth of assets – which would represent $60 billion in equity and $1.94 trillion worth of debt.

What would it take to gobble up that little piece of sushi? Well, collateralized debt obligations (CDO) represented a $6.1 trillion market. I say 'were' because I am guessing that this figure refers to the value of the CDOs when they were issued. And CDOs seem to be worth some amount below that now. I have seen estimates that they are worth 20 cents to 40 cents on the dollar of their original value.

But if investment banks and hedge funds had used all their money to buy these CDOs, then it would take a mere 6% decline in their value to wipe out that $340 billion in capital. Obviously investment banks and hedge funds have invested in other things besides CDOs. But when you borrow $32 for every dollar in capital, there's not much room for error.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The Associated Press reports that JPMorgan Chase & Co. (NYSE: JPM) reported earnings that missed earnings expectations of 94 cents per share by 9%. And its 86 cents a share actual earnings disappointed investors. Nonetheless, the stock is up in pre-market trading.

The culprit was --once again -- consumer lending. JPMorgan Chase boosted its provisions for loan losses by $2.54 billion. That boost was higher than the $1.79 billion added during the third quarter and the $1.13 billion added in the year earlier period. The investment bank's profit plunged 88% to $124 million, and the card services' segment's profit fell 15% to $609 million. The company anticipates rising default and delinquency rates in credit cards.

A bit of good news for JPMorgan Chase. Commercial banking profit rose 13% to $288 million, Treasury and Security Services profit rose 65% to a record $422 million, Asset Management profit rose 29% to a record $527 million, and Retail Financial Services climbed 5% to $752 million, as improvements in mortgage banking offset weakness in auto lending and regional banking.

For 2007 JPMorgan Chase's net income in 2007 was a record $15.4 billion, or $4.38 a share, on record revenue of $71.4 billion. Overall -- not too shabby compared to its peers.

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 JPMorgan Chase securities.

Both Merrill Lynch (NYSE: MER) and Citigroup (NYSE: C) plan to raise a great deal more money to shore up their battered balance sheets, mostly from foreign governments.

According to The Wall Street Journal, "Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments."

While the investments may raise questions in Washington about overseas capital controlling large interests in US financial companies, it also begs a more interesting question. Why aren't large pools of US capital investing in US companies? Certainly Warren Buffett or Calpers have the funds to take large pieces of companies like Citigroup.

The answer may be that sovereign funds have a much longer time horizon to get their money back. That would make sense since they only answer to their governments.

The only other explanation is that US institutions don't have much faith in the American economy and financial structure.

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

To a Wall Street compensation neophyte, a "bonus" would seem to be something paid in the event of performance beyond that which is expected. A reader of Dictionary.com might reach a similar conclusion:

bo·nus /?bo?n?s/ Pronunciation Key - Show Spelled Pronunciation[boh-nuhs] noun, plural -nus·es.

1. something given or paid over and above what is due.
2. a sum of money granted or given to an employee, a returned soldier, etc., in addition to regular pay, usually in appreciation for work done, length of service, accumulated favors, etc.

So in light of the multi-billion subprime losses that nearly every major Wall Street firm is taking, how can it be that bonuses at Morgan Stanley (NYSE: MS) soared 18% year over year after a $9.4 billion writedown on bad mortgages? The stock has lost about a third of its value in the past few months, raising questions about the value the company has provided to shareholders.

You almost have to stand in awe of CFO Colm Kelleher's explanation: "If you were to normalize our business ... you would see we had a record year across the whole enterprise". (Emphasis added)

On Tuesday, almighty Goldman Sachs (NYSE: GS) reported record earnings for the umpteenth time. And, as usual, the company's earnings report was the biggest story of the day (there are already more than 40 different takes on this news from major news sources). I won't waste your time with all the intricate details; I'll summarize by saying I'm not impressed. Sure, I respect Goldman as the best of breed company in their sector -- not that it's very difficult to outperform writedown-loving Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS) -- but c'mon, for all their pedigree, their stock stinks!

No matter the record $3.17 quarterly profit and the incredible amount of hard work put in by the company's 34,809 full-time employees, based on Tuesday's closing price of $201.51, Goldman's stock is nearly $50 off its highs and up only 79 cents per share, from $200.72, since the beginning of 2007. Again, better than their competitors, but in terms of stock performance, aka the only thing that matters to investors -- pathetic.

That's right, let all the talking heads and journalists report on Goldman's results and debate what it means for the financial sector, the economy, the fate of the world, etc., I care only about their stock. So, I say don't let this company's solid business performance and widespread popularity fool you, there are bigger issues in play here that will continue to haunt this stock. With the mounting uncertainty over the housing market, consumer debt, the economy, and this tired-looking bull market, there are far more interesting stocks out there and if you're comfortable with short selling, then even Goldman's competitors become better plays because their stocks at least exhibit a clear trend (a perfect downtrend that is)!

Timothy Sykes writes the blog timothysykes.com, is a former hedge fund manager, the star of the TV show Wall Street Warriors and author of the book, An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund

FT.com reports that newly appointed Merrill Lynch & Co. (NYSE: MER) CEO, John Thain, wants to remake Merrill in Goldman Sachs Group's (NYSE: GS) image. In particular, Thain wants different parts of Merrill to work more effectively as a team.

The irony of this idea is high. That's because Thain's predecessor, Stanley O'Neal hammered his subordinates every quarter as Goldman outperformed Merrill. O'Neal led a big increase in Merrill taking on more trading risk because he thought that was what led Goldman to do so well. It was this Goldman envy that ultimately led to O'Neal's downfall.

Now Merrill's board has someone who worked at Goldman -- Thain spent most of his Wall Street career in the Goldman system, rising to become co-president before leaving in 2003 -- to try again to remake Merrill in Goldman's image. In my book, Value Leadership, I compared the Goldman and Merrill cultures and concluded that Merrill has a long history -- dating back at least to 1995 -- of encouraging internal competition based on a star system that creates massive amounts of turnover at executive levels.

I predict that Thain will face enormous resistance when he tries to impose the Goldman system of teamwork onto the Merrill culture. If he succeeds, he deserves enormous admiration.

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.

It is a tough call to make. Picking a bottom in any stock or sector is tricky and sometimes just pure luck. Typically, a bottom is put in with little to no fan fare as it is not truly recognized until well after it has happened. But the action on Thursday in the financials, especially with Citigroup (NYSE: C) was most interesting.

Citigroup has averaged 52 million shares traded daily these past three months. Today, with no news announced, it traded 194 million shares. The most fascinating detail was it traded 100 million of those shares in the last hour with the stock rising from a $31.05 low to close at $32.90. That's major institutional buying that occurred.

We all know the news has been awful and more write-offs are coming in the 4th quarter. Investors expect that the 4th quarter write-offs had better be complete and without the "drip-effect" carrying into 2008.

Although this entire credit crisis is very complicated and full of advanced accounting principles, the "cash flow" of these mortgage portfolios is actually in pretty good shape. IT IS THE UNDERLYING VALUE of the securities that has been marked down. Citigroup made it clear this past Monday that even the higher quality BBB- to AAA -rated mortgage paper has been marked down by the rating agencies, thus causing the bulk of the write-offs. But the underlying mortgagees are paying their monthly debt thus he cash flow is supporting the portfolios. It is a confusing mess, but Citigroup will make it and thrive again.

I should be hesitant to admit this on a financial blog, but there's really only one reason that I've never purchased shares of an investment bank on my own, outside of those that I own through an index fund: The financials are often very complex, and difficult for me to understand with the level of depth that I like to have before I make an investment.

Apparently Fortune's Peter Eavis agrees with me, at least on the most recent numbers. Lehman Brothers Holdings Inc. (NYSE: LEH), The Bear Stearns Companies Inc. (NYSE: BSC), and Goldman Sachs Group, Inc. (NYSE: GS) all booked substantial gains from hedging bets/shorting mortgage bonds. Eavis asks thought-provoking questions, one that I somehow doubt many of the investors who have been pushing shares of these stocks up in recent weeks have bothered asking:

How, for instance, can it be that the three firms were able to rack up large gains by betting in the same direction? Were these bets made in liquid markets where prices are dependable and positions can be sold quickly? Or were they made in illiquid markets where brokers have to make their own estimates about what the bets are worth - and where it may be difficult to exit?

Very interesting. For now, the earnings for Bear Stearns appear to be somewhat of a "black box", exactly the way one analyst described Enron in March of 2001. At the time, Goldman Sachs analyst David Fleischer disagreed: "Enron is no black box. That's like calling Michael Jordan a black box just because you don't know what he's going to score every quarter."

Of course, I'm not suggesting that any of these firms are involved in any kind of fraud. But one of the most important, and most neglected, questions to ask before investing in a stock is "Do I really understand the earnings?"

In the case of these firms, I sure as heck don't, and so I'll stay on the sidelines.

The Wall Street Journal [subscription required] suggests that with the collapse of financing for leveraged buyouts -- their share of total M&A rose from 14% in 2000 to 37% through July -- the M&A business is contracting. Deal volume in August fell by more than half from the previous month. Specifically, August deal volume globally was $222 billion -- the lowest monthly total since July 2005 -- a third of the $695 billion figure struck in April and less than half the $579 billion in July.

But hope springs eternal for the deal salesmen. With the drying up of credit for the LBO crowd, M&A professionals are hoping that so-called strategic deals -- merger pacts made between corporations -- will pick up the slack. Tuesday I happened to be watching CNBC when a couple of strategic acquisition cheerleaders tried to outdo each other talking about all the wonderful corporate mergers on the horizon.

The deal bust will have significant economic repercussions in New York. Lower M&A volume means lower bonuses for M&A bankers and those financiers that raise the capital to pay for LBO deals. Moreover, the collapse in the alphabet soup of securities backed by subprime mortgages, credit card receivables and others will lead to more layoffs. Finally, hedge funds which invested in this toxic waste will continue to fold -- diminishing the bonuses of those who run these funds.

Citigroup (NYSE: C) should be two companies -- at least.

The break-up I envision would separate investment banking and corporate financial services from retail banking, lending, insurance and brokerage services. The investment banking sector is going to advance much faster in the next ten years than the retail sector, and the two have nothing in common.

Citigroup is not too big, it is too disoriented. CEO Chuck Prince is trying to sculpt Mount Rushmore with a pocket knife and given another 200 years maybe he could do it. But he does not have that much time and nobody will be around to see the result, even if it could be done. You can find the case for this in my recent post Chasing Value: Bear Stearns - cheap and growing.

Some investment banks might even be prospective merger and acquisition targets for a new leaner and meaner Citigroup partner. Bear Stearns (NYSE: BSC), which I own shares in, is small enough to be in play and there are others.

Look at the history of Wall Street and you will see a major theme: conflicts of interest. After all, the business is based on relationships.

Conflicts of interest are not necessarily bad. So long as there is disclosure – and clients understand the dynamics – it should be fine.

But, there should still be vigilance. That's the take from a recent piece in the New York Times.

In fact, with the surge in private equity deals, it's getting tough to see who's representing who.

Perhaps the biggest issue is when investment banks engage in their own deals and also advise the client. This is actually becoming common for firms like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and Merrill Lynch (NYSE: MER)

But in this scenario, is the client really getting good advice? Or is the investment bank just trying to get a juicy deal?

One way to manage this has been for investment banks to invest alongside others. Thus, there would be no control position.

But with Goldman raising a $20 billion fund and other investment banks in the process of forming mega funds, is this realistic?

In other words, investment banks are going to start looking more and more like private equity funds – that, incidentally, provide advisory services.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.