The Fed Reserve seems to be moving towards implementing regulation and monetary policy shifts to stop asset bubbles from building up. In a series of comments by Federal Bank Governors, they have let it be known that preventing buildups like the dotcom and housing bubbles may become a priority for the Fed.

Ben Bernanke, current chairman, endorsed the Greenspan view in 2002 following the bursting of the dotcom bubble, though with the caveat that central banks should use microeconomic regulation to mitigate the risks caused by bubbles. Six years on, Mr Bernanke still believes it is hard to know when a bubble is a bubble. But he and other top officials are reviewing the Fed approach following the second big and disruptive bubble in a decade. One option would be for the Fed to tackle bubbles with monetary policy, setting interest rates higher than they would otherwise be when asset prices appear to be inflating beyond levels justified by economic fundamentals. Mr Bernanke rejected this approach in 2002 but is willing to re-evaluate it in the light of recent events.

Still, he and other top officials remain sceptical that "leaning against the wind" with interest rates is an effective strategy. They regard interest rates as a blunt tool for the job because they affect the economy and asset markets as a whole, not the specific market with a bubble. By contrast, there is widespread interest inside the Fed in using regulatory policy more aggressively to try to contain bubbles. Officials are intrigued by the extra possibilities that could be opened up by proposed new powers set out in a Treasury blueprint for regulatory reform. The Treasury recommends giving the Fed wide authority to require financial institutions to alter behaviour that it believes poses a threat to financial ­stability. - Fed looks at ways to fight asset bubbles, Krishna Guha, Financial Times, 13th May 2008

Forbes has extracts of a speech by Fed Governor Frederic Mishkin at the Wharton Business School Financial Risk Roundtable in Philadelphia. 'Monetary policy should not try to prick possible asset bubbles, even when they are of the variety that can contribute to financial instability,' he said. He joined a group of Fed officials that now includes Chairman Ben Bernanke and Minneapolis Fed President Gary Stern who are at least thinking about departing from the Greenspan doctrine. Former chairman Alan Greenspan insisted that central banks had no business trying to prick or prevent asset price bubbles, only to be prepared to clean up the mess after they burst.

Here's what Gary Stern said about attacking bubbles, from WSJ's Real Time Economics blog.
WSJ's Justin Lahart writes about 3 Princeton economists hired by then Professor Bernanke - Harrison Hong, Wei Xiong and Markus Brunnermeier - to study bubbles using mathematical methods.

When differences between bullish investors and bearish ones are extreme, many of
the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher. In housing and the credit markets, the innovation was slicing and dicing loans in novel ways. As investors bought the resulting mortgage securities, they provided abundant capital for home buyers; buoyed by this and falling interest rates, house prices surged. Betting against house prices is hard; only a few sophisticated investors found roundabout ways to do it, in derivatives markets. Most skeptics about the housing boom just sat it out; the optimists were unchecked. At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down. There's an expectation that at this point, investors who were skeptical may see prices as more reasonable and start buying. If they don't, that's a signal that prices had gotten way too high -- and then they tumble.

When a lot of borrowed money is involved -- as it often is in a bubble -- once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt. That pattern offers a strong argument, in Mr. Hong's view, for government to restrain bubbles and the borrowing that fuels them. - Bernanke's Bubble Laboratory, Justin Lahart, Wall Street Journal, May 16, 2008

And this is what Bernanke himself said in a speech in 2002 on Asset price "bubbles" and monetary policy. In this speech, Bernanke makes very detailed arguments both for and against Fed regulation to prevent asset bubbles. One of the points he makes is the difficulty in identifying bubbles and the fallout on growth if the Fed comes in too strong.

There's a green revolution in progress in Silicon valley right now, with investors pumping tens of millions into tiny startups who are producing and researching alternative energy devices and products. Like as not, it's a bubble building up, and a majority will fold up within a couple of years. But in the middle of that carnage could be a little gem of a startup which could come up with something amazing, and trigger a decade long bull run by freeing us from oil imports.
To understand this on a basic level, read this great article by Robert J. Shiller in the New York Times which explains how a post-bubble depression can cause an 'anti-bubble' where a downward cascade will develop — in which rational individuals become excessively pessimistic as they see others bidding down [home] prices to abnormally low levels.

Can the Fed walk this fine line and regulate bubbles without destroying innovation and investor confidence?

Billionare activist investor Carl Celain Icahn, it seems, bought a cool 50 million Yahoo! shares in the past week alone, worth about $1.3 billion which gives him a 3.5% stake in Yahoo! Inc., and is now said to be considering a proxy fight with the Yahoo Board, in an attempt to get control of seats on the Board. Photo courtesy & copyrights Icahnreport.com

He has also sent out feelers to Microsoft, trying to get them to reopen negotiations. Yahoo! Inc. shares (NASDAQ: YHOO) rose 5.2% to $26.56 (and another 13 cents in after hours trading) based on speculation about the impact of this development. Before we analyze the 'why' and the 'what-happens-now' part, here's some more details about Icahn's move from media reports.

WSJ report cites a source who says that Mr. Icahn is expected to decide Wednesday whether to launch a proxy contest. A Yahoo deadline for board nominations looms Thursday. He currently has no assurances from Microsoft it would reconsider a Yahoo purchase, according to the person. The person said that Mr. Icahn was unsure whether he would nominate a full or partial slate of candidates to try to replace Yahoo's 10-person board. A shareholder vote on nominees is scheduled to take place at Yahoo's annual shareholder meeting on July 3. Even without any certainty of an eventual Yahoo sale to Microsoft, Mr. Icahn considers its shares an attractive value and is willing to hold them for an extended period. - Icahn Buys Yahoo Shares; Mulls Board Proxy Contest, Gregory Zuckerman and Kevin J. Delaney, Wall Street Journal, May 14, 2008.

(Update 1: WSJ reports Icahn will launch proxy fight and nominate 10 directors to replace Yahoo's board, and also that he has hired D.F. King, a proxy firm, to work on a proxy solicitation. Also, that Yahoo's Google ad deal may be in hot water. Stay tuned for more on this.)

(Update 2: Bloomberg News report has some interesting stuff. Icahn said he has sought regulatory clearance to buy as much as $2.5 billion in Yahoo stock, about 6.7 percent of the company's outstanding shares as of April 30....John Paulson, who runs the New York hedge fund Paulson & Co., said today that he will support Icahn's directors...Paulson & Co. owned 50 million Yahoo shares at the end of March.)

Ok, time to bring out the Yahoo-MS crystal ball again. Here's some background info for the Yahoo-MS Takeover bid. So Carl Icahn wants to nominate his own candidate slate for the Yahoo Board. That would mostly make sense if wither of two things happen - First, Microsoft joins hands with him and re-enters the fray. Or, Icahn uses his new found clout to force the rest of the board to reopen negotaitions with Microsoft.

The first assumption is DOA. There's no way Steve Ballmer, having just played the part of jilted lover, is now going to change his stance again. Microsoft will, without any doubt, stay away from this particular fight. Ballmer will prefer that Yahoo!'s shareholders do all the dirty work for him, take control of the board, and then ask Microsoft to step in and takeover at a price somewhere in between the last offered price of $33 and Yang's expected price of $37. So let's say, under this scenario, that Yahoo investors stage a mutiny, lynch the Board, take control, and then invite Microsoft to buyout Yahoo, at say a price of about $35.

Now this isn't going to happen in a day, but if Icahn does jump in, then other Yahoo shareholders are going to take a wait and see approach. They'll see how the Yahoo Board responds to Icahn's pressure, and then decide whether there's any realistic chances of staging a successful mutiny. This process could take anywhere between 15 to 20 days, and by the time the Yahoo annual sharholder meeting on July 3 draws closer, you'll see a steady buildup of pressure, with both sides trying to make sure the shareholder meet is just a formality. Meaning that either Yahoo will already be taken over by activist investors before that, or Jerry Yang's crowd will have beaten them back before the share holder meet up.

The situation is made worse because the current Yahoo Board itself is ridden with factionalism. New York Times report by Andrew Ross Sorkin and Miguel Helft notes that at last year’s annual meeting, shareholders representing 35 percent of Yahoo shares voted against the re-election of two directors, Ron Burkle and Arthur Kern, while those representing 34 percent of shares voted against another director, Roy Bostock, who has since become chairman. Shareholders owning 6 percent or more of the company’s shares also voted against the re-election of other directors, including Mr. Yang, who became chief executive shortly after the meeting.

In summary, here's what my crystal ball says is going to happen, going forward. Icahn, if he decides to go forward with the proxy fight, will be alone, at least to start with. If it looks like he's making progress, some more powerful Yahoo! shareholders will jump in to join hands with Icahn. Microsoft, for the most part, will remain out of the fray. The proxy fight will be resolved, one way or the other, sometime in mid-June. On July 3, the date of Yahoo's annual shareholder meet, Yahoo will be sold to Microsoft, with or without the current Board, for about $35. All of which makes Carl Icahn one smart cookie, cause he's about to make half a billion dollars in a little over one month.

Bio: Carl Icahn's net worth, as of 2007, was $14.5 billion, making him the 18th richest in the United States. He is ranked 46th on the Forbes billionares list . He has a BA from Princeton University and lives in New York. He is married and has two children. He is the CEO of Icahn Management LLP, and Chairman & President of Icahn Associates Corp., and Chairman of Starfire Holding Corporation (formerly Icahn Holding Corporation). Read his full executive profile at Businessweek and here's Icahn's Forbes 2008 listing.

Bentonville, Arkansas based retailer Wal-Mart Stores Inc. topped analysts' forecasts by 1% to post a net income of $3.02 billion (76 cents per share) for the quarter ended April 30th, an increase of 6.9% over last year's first quarter income of $2.83 billion (68 cents per share). Revenue rose 10% to $94.1 billion.

Donna Kardos, Wall Street Journal, reports that, looking forward, Wal-Mart projected fiscal second-quarter earnings of 78 cents to 81 cents a share. Analysts were expecting 81 cents. U.S. same-store growth is seen flat to up 2% growth. Shares of Wal-Mart closed Monday at $58.02 and fell to $57.65 in premarket trading.

Also, Wal-Mart may be benefiting from a bump in overseas sales to counter the slowdown in the U.S. market. Marketwatch reports that outside of the United States, Wal-Mart's expansions into international markets such as Brazil and China also are yielding fruit, countering the consumer slowdown in the United States, analysts added. First-quarter sales outside the States surged 22%, compared to the 6.6% growth at Wal-Mart-branded stores and 7.6% sales growth at Sam's Club.

The drop in Wal-Mart's share price is not only due to its own internal grim projections for the next quarter, but also due to lagging sales and expectations of a continued slow outlook throughout the retail sector for the coming quarter. Continuing in this vein, Tom Van Riper, Forbes, writes about a 'black tuesday' for retailers. Big department stores Macy's, which reports on Wednesday, and J.C. Penney, which goes on Thursday, are both expected to show a 4.5% decline in sales. Lehman Brothers economist Drew Matus sees a fundamental slump in consumer spending lasting through the first quarter of 2009, save for a modest early summer push spearheaded by government rebate checks.

So, if anything, Wal-Mart is actually benefiting because consumers are migrating to it from other retailers. More on this from Chris Burritt, Bloomberg News. Wal-Mart, Target and Costco are all continuing to gain market share in this environment,'' Susan Kahn, a Target spokeswoman, said yesterday in a telephone interview. They're probably taking shoppers from retailers with falling comparable-store sales, she said.

In related Wal-Mart news, initial findings of a study at the Center for Urban Research and Learning at Loyola in Chicago shows a relation between a Wal-Mart opening and local retailers going out of business. Report from Sandra M. Jones, Chicago Tribune reporter, states that researchers from Loyola University Chicago and the University of Illinois at Chicago tracked 191 stores within a three-mile radius of Wal-Mart from March 2006, six months before the store opened, through November 2007. The team found 23 stores, or 12 percent, of the businesses in the study group shut down last year.

I hate to say I told you so, but I did. Regulators are piling on the oil industry, in the wake of a public backlash after oil crossed $120, and fears of $150 to $200 oil percolated through the media into the mainstream. CW is that oil is upwardly mobile regardless of the situation on the ground.

The Federal Trade Commission last week said it would delve into the workings of the oil industry, examining scenarios such as the withholding of supplies from the market, as it prepares to write rules banning market manipulation. To bolster U.S. leverage over Middle East oil producers, Senate Democrats are threatening to block various arms deals with Saudi Arabia and other members of the Organization of Petroleum Exporting Countries. The House Judiciary Committee is holding hearings this month on high gasoline prices, and has called on OPEC's secretary general, Abdalla Salem El-Badri, to testify. - Regulators Target Oil Industry, Siobhan Hughes, Wall Street Journal, May 6th 2008

On the other hand, Senate Republicans are seeking hearings on the fall of the dollar. The GOP lawmakers said the hearings should focus on the impact of the Fed's rate cuts, the threat of potential tax increases on investment, the effect of trade policy on exports, and the potential for federal policies to discourage bringing new oil supplies online. - Republicans Seek Hearings on Dollar's Fall, Henry J. Pulizzi, Wall Street Journal, May 3rd 2008

Maybe the two sides might consider teaming up and holding joint hearings on the price of oil and the fall of the dollar? Far be it from me to belittle the honorable intentions of Congress, and besides, I dare say the oil industry could do with a little more oversight, but the problem is that all these would be regulators are barking up the wrong tree. For starters, the Democrats are simply pandering to their base when they imply that oil producers are creating a shortage. Secondly, as far as the fall of the dollar is concerned, the Republicans should maybe take note that the Fed is simply reacting to the markets. Piling on them for reducing interest rates when there's a credit crunch is like compaining about firefighters breaking in your window when the house inside is on fire.

My point here is that an excess of capital in the commodity markets is beginning to hurt ordinary people. The oil boom is not taking place in a vacuum. And neither is the rice shortage or the increasing worries about feeding the planet. It's all part of the global financial ecosystem, which has gone out of whack due to the recession in the U.S. Simple logic is that all the money sucked out of the U.S. stock markets is being pumped into commodities. Which is creating a boom in futures, and a perception of increasing demand. If left alone, it'll get back to normal if and when the U.S. market stabilizes. Oil will drop back to just under $100, and worries of food shortages will subside.

Only question is - Can we survive this period of zooming commodity prices without sustaining permanent damage to the way things work? The regulators growling at oil producers and the Fed will slowly realize, provided this crisis continues, that they have the wrong target. What I mean is, regulators might realize that it's not the oil producers who are speculating and try to put a temporary cap on the price of oil - Markets be damned. That would no doubt be an extreme step, but it could happen, given a big enough backlash.

State controlled commodity pricing has been around in a lot of countries for decades now, and these countries have been able to ride over such 'artificial' problems created by global speculation, since the global trading prices don't actually get passed on to consumers. No doubt it would shatter the existing free market system, with a maze of ramifications too big to be explored here. But it would have a big calming affect on consumers, bump up spending and stabilize both the dollar and the U.S. stock markets. Are we at that stage yet? Nope, but if the stock markets don't regain confidence, that's where this boat is headed to. It would need a big Democratic majority in Congress, and a Democratic White House, and maybe another big crisis on Wall Street which jilts investors badly. Is a perfect storm like that so far-fetched?

So Rep. Paul Kujawski of Webster, MA, sponsored an amendment to the House budget for studying whether university endowments worth over $1 billion in the state should be slapped with a 2.5% tax. This has a created a little storm in academic circles in MA, with every two bit economist and every major media outlet coming out against the proposal.

"When is a nonprofit not a nonprofit because of the wealth they are acquiring?" said Representative Paul Kujawski, a Democrat from Webster and chief backer of the legislation.
"It's mind boggling that one entity not paying taxes has $34 billion. How do you justify that?" said Kujawski, who serves on the influential House Ways and Means Committee. "When people can't afford to live. How do you justify not taxing them?" - Lawmakers target $1b endowments, Peter Schworm and Matt Viser, Boston Globe, May 8, 2008

But before we go into who is saying what, here's a bit of a backgrounder. This concept of taxing endowments actually has been bandied about in Washington DC ever since late last year, when endowments around the nation announced their blockbuster annual endowment investment performance reports. The ostentatious reason being given for taxing endowments is to lower tuition fees. It seems if the endowments spent 1% of their money on financial aid, they could altogether eliminate undergraduate tuition fees. The point was that the tax-exempt status of the endowments should be tied to lower tuition fees. Whatever the merits of this proposal, as usually happens in politics, the money goes in, but nothing comes out. So, this proposal being studied by the MA House would simply tax the endowments, period.

All right, let's down to the vicious reaction to the endowment tax by a horde of angry Harvard economists and sundry interested parties.

The Harvard Crimson has an article titled 'The Tax Stops Here', which should be sign enough of which way the wind is blowing in Harvard. This sort of amendment would have given life to the practice of the state penalizing monetarily successful universities—namely Harvard—for being just that. Only eight schools in Massachusetts have endowments over $1 billion: Harvard, MIT, Williams, Boston College, Amherst, Wellesley, Tufts, and Boston University. But with a $34.9 billion endowment, Harvard would see the greatest payout by far. The university with the next-largest endowment, MIT, has $9.98 billion.

Harvard's premier econblogger goes one step further and suggests that its time for Harvard to move and start a second campus outside the state, transfer much of the endowment to the new campus and support the old one by selling off land in Massachusetts. The good Professor seems a bit miffed...

The Boston Globe editorial page suggest its a good way - To strangle the economy. Harvard alone, with its endowment of $34 billion, would be on the hook for $840 million a year. But a tax of this magnitude on the state's universities and colleges would be economic suicide....The Legislature should abandon the endowment tax - an ill-conceived money grab that ignores how vital higher education is to the local economy.

The most unbiased article I read on this issue comes from InsideHigherEd.com, which contains reactions from both sides of the debate.

“I think that legislators, and I don’t think Massachusetts is unique in this, are simply frustrated by the pressures they’re under to solve lots of problems with decreasing revenues” from property taxes and other sources, said Richard Doherty, executive director of the Association of Independent Colleges and Universities of Massachusetts, which represents the state’s private colleges. As they are “turning over rocks and stones looking for money,” as Robert Brown, the president of Boston University, put it, it’s perhaps not surprising that their attention was drawn to college endowments, since “the size of one of our colleges’ endowment seems to attract a fair amount of attention,” Doherty said, referring to Harvard. So is the idea, he was asked, that maybe there’s more money to be gotten?

“Absolutely,” Kujawski said. “We were saying the first billion isn’t going to be touched. So maybe more of these schools might provide more funds for their students, to stay under the billion. A billion dollars is a lot of money.” - Doug Lederman, InsideHigherEd.com, May 1, 2008

The article additionally focuses on the point that the sponsors of the amendment were merely trying to bring attention to the issue, and use it as a kind of motivator to get the endowments to spend more, rather than actually follow through and implement the tax. It should be noted that after the endowments came under Washington's radar last year, the Universities, led by Harvard, with a lot more following suit, increased financial aid for middle-class students. So, pressure does work. Only question is, will Massachusett's lawmakers know when to stop?

There's big trouble in little Liechtenstein, and UBS AG's private bank just got caught in the crossfire between U.S. prosecutors and U.S. nationals with funds tucked away in the Principality of Liechtenstein. According to the Wall Street Journal, U.S. prosecutors, aided by a former 'UBS insider', now have the names of American clients of UBS AG's private bank, along with details about possible collusion between these clients and UBS employees in an effort to avoid taxes. The probe originally started with an investigation of Liechtenstein's LGT Bank by German prosecutors, and soon spiralled into an international tax evasion probe. More details and background information here.

U.S. prosecutors are investigating whether the private bank, which provides services to wealthy individuals, was involved in tax-evasion schemes that may have been carried out through Liechtenstein. UBS disclosed in a securities filing that the U.S. Justice Department and the Securities and Exchange Commission are examining whether UBS aided U.S. clients in avoiding taxes. The probe is focused on advice given by UBS between 2000 and 2007. According to the filing, the Justice Department "is examining whether certain U.S. clients sought, with the assistance of UBS client advisors, to evade their U.S. tax obligations."

The UBS probe is being led by the U.S. Attorney's Office for the Southern District of New York and may have ties to an investigation being conducted by the Internal Revenue Service and other national tax agencies into how banks in Liechtenstein played a role in helping German, U.S., British, French, Canadian and Australian clients evade taxes. A spokesman for the Justice Department declined comment. -

Probe May Lay Open UBS, By GLENN R. SIMPSON in Washington, DAVID CRAWFORD in Zurich, AND CARRICK MOLLENKAMP in London, Wall
Street Journal, May 8, 2008

According to this Bloomberg report by Otis Bilodeau, Martin Liechti, the Zurich-based head of UBS's international wealth management business for the Americas, was briefly detained by U.S. authorities as a material witness. The U.S. Securities and Exchange Commission is also investigating whether UBS employees in Switzerland who advised U.S. clients failed to register with the agency as required. The employee who was detained hasn't been charged with any wrongdoing, though will remain in the U.S. "pending discussions with the U.S. authorities regarding resolution of his status as a witness,'' the bank said.

To sum it up, U.S. prosecutors were investigating tax evasion by U.S. nationals with accounts in Liechtenstein's LGT Bank. The trail led them to a former UBS insider who not only gave them a list of U.S. clients of the bank who had these off-shore accounts, but also gave prosecutors the inside track on how exactly UBS was involved in helping clients evade U.S. taxes.

(Update 1: Federal authorities indicted a former UBS banker, Bradley Birkenfeld, on charges of helping an American real estate developer evade taxes. New York Times report identifies the developer as Igor Olenicoff, the founder of Olen Properties. The indictment also names as a co-conspirator Mario Staggl, an executive at a trust company in Liechtenstein.)

(Update 2: WSJ report says U.S. prosecutors are expected to confront Swiss banking giant UBS AG with a broad subpoena for the names of wealthy American clients who may have used its services to avoid income taxes, according to lawyers and others involved in the case.)

As for UBS, they seem to be attracting probes like moths to a flame. In addition to this probe, Prosecutors in Germany are considering opening a criminal probe into allegations that UBS offered Germans help in hiding funds from local tax authorities, the Mannheim Prosecutors' Office said March 31.

And, UBS plans to exit the municipal bond underwriting business, with yet another probe in progess by Massachusetts Attorney General Martha Coakley into whether municipalities were misled by UBS into purchasing securities that weren't a 'permissible investment' under state law. More details from Michael McDonald, Bloomberg News. UBS AG agreed to refund $35 million to 20 towns and public agencies in Massachusetts that bought auction-rate securities from the Zurich-based bank amid a state probe into the sale of the debt. Authorities are still investigating whether the firm lied to investors about the bonds, which would result in penalties under the state's False Claims Act.

To top it all off, investor faith in UBS has taken a nosedive after the Swiss banking giant announced plans to cut 5500 jobs in the next year in response to a whopping 2008 Q1 loss of $10.97 billion in the wake of the subprime mortgage crisis and massive total writedowns todate worth $37 billion. UBS is selling subprime mortgage debt worth $20 billion at a 25% discount to Blackrock for $15 billion. UBS has already taken in capital infusions twice in the last few months, including a $12 billion cash offer from the Government of Singapore Investment Corp. (GIC), and an unidentified middle-east investor.

I was waiting for the fallout from Yahoo's rejection of the MS deal, before publishing this article. If you dig deep enough into these deals we've seen in the last couple of months, there seems to be a deep malaise, for both the buyer and the buyee. The Bear Stearns, Countrywide Corp. and Yahoo! Inc. deals are all a real cause for worry - For the buyers, for investors and for Wall Street - Much more so than any more MBS writedowns or lack of liquidity. The question here is, were these companies worth saving from going bellyup? There's a big difference between finding value in a downturn and paying through the nose for a company with a deep rot.

Let's consider all three one by one.On Jan 9th 2008, there was a near state of panic based on Countrywide bankruptcy rumors. Couple of days later, after the BofA-Countrywide deal was announced, things satabilized, and people have just about forgotten why the company was about to file for bankruptcy. Chris Kaufman, Dealzone, reports that Countrywide had outstanding debt of about $97.23 billion as of Dec 31, including Federal Home Loan Bank advances of about $47.68 billion, which it expects will remain outstanding until repaid by Countrywide Bank. And according to this Bloomberg report, Countrywide would be split into good and bad companies, with the debt going into the junky one.

And Bank of America is now being urged to reconsider their Countrywide bid. Ari Levy and Christopher Stern, Bloomberg News, report that Sen Chuck Schumer (D-NY) wants BofA to consider cutting the $4 billion price tag for the deal. Investors have speculated that Bank of America may seek better terms or cancel its takeover of Countrywide because housing markets and the mortgage lender's performance have deteriorated since the January accord. Friedman, Billings, Ramsey Group Inc. analyst Paul Miller said Bank of America should walk away because Countrywide's loan portfolio would be a ``drag on earnings.''

Point is, the deal has been slowly falling apart inch by inch in the last couple of months, as it becomes apparent that BofA has no intention of saving anyone but themselves. Before we get into a deeper analysis about the wisdom of propping up failing firms, let's cut to Bear Stearns.

The reasons for bailing out Bear have been probed exhaustively by everyone and their aunt, so let's just cut to the chase. The deal may have been a tad bit more than JPMorgan can handle, and while the Fed and public money stand to lose first, the deal still adds to JPMorgan's derivative exposure. Roddy Boyd, Fortune Magazine, has an article which explores the reasons behind the urgency when JPMorgan upped the Bear share price from $2 to $10. It wasn't just investor pressure, it seems. The dispute that nearly brought Bear down a second time turned on whether JPMorgan would stand behind Bear Stearns' massive credit default swap book and other liabilities.

To make a long story short, JPMorgan agreed. And that has brought JPMorgan to place where it stands on slightly dicey ground. But while the deal is now securely in place, it's not certain that a happy ending is in sight. After the merger, JPMorgan - with around $91.7 trillion in total derivative exposure - will solidify its position atop the derivative league tables. Citigroup is a distant second at $34 trillion, according to the Office of the Comptroller of the Currency.

Anyone want to bet how long it takes before JPMorgan decides that the whole Bear thing was a just a bit too much, and asks the Fed for help in unwinding the deal? Would anyone have cared two hoots about this when Bear Stearns was on the edge of bankruptcy and Wall Street was trembling? Nope, but now that Bear's problems no longer threaten anyone else, the worms are starting to crawl out, and again, inch by inch, Bear's problems are slowly taking a toll on JPMorgan. This is the same pattern that was followed by Countrywide-BofA.

Yahoo's shares were around $19, and Yahoo was in the middle of 'corporate restructuring' and layoffs, when MS announced the takeover bid. Admist all the well-documented hoopla of the takeover, the issue that was lost was why Yahoo was in trouble in the first place, and whether there any systemic problems which could become a drag on Microsoft once the deal was consummated. That question still stands. Will Microsoft, after paying over $40 billion, be able to turn around the failing internet properties of Yahoo! Inc.? Just beacuse they want to compete with Google, MS can't afford to keep Yahoo's blaoted web properties as they are, and make MSFT shareholders pay for it. Which means, in all probability, that the Yahoo-MS deal, if agreed upon, will follow the same path as Countrywide-BofA and Bear Stearns-JPM.

Inexorable forces on Wall Street push the deal towards completion, and then, when reality sets in, well...the renegotiation starts. Point of all this is that unlike finding value in a downturn, these deals gone bad represent the ugly side of Wall Street. To placate investors and keep the markets from going into a tailspin, unmanageable assets are being taken on by buyers, a status quo that doesn't last more than a couple of months. A more long term solution would be to do what BofA is likely planning on now. Split the ailing company into good and bad, keep the good parts and sell off the bad piece by piece, and let the company's shareholders take the hit. What these companies need are bankruptcy managers, not bailouts.