$$$ Jeffrey Epstein in Real Life [Daily Intel]

$$$ Adventures in Diligence II: The Paper Cut [Going Private]

$$$ Are Walruses Efficient? [LoSC]

$$$ MBIA wins through sheer force of boredom. [Portfolio]

The inquiry into what the banks knew about the structured credit products they built from mortgages has begun to show signs of moral panic and paranoia. Already we’re seeing the typical result: really bad, radical ideas being put forth as sensible, or even obvious reforms.

Take the proposal coming from some securities industry specialists to make public the due-diligence reports provided to banks by independent diligence specialist. “We need to...improve the due-diligence process by standardizing it and by disclosing" the results to ratings agencies and investors, said Rod Dubitsky, head of asset-backed securities research at Credit Suisse Group, told the Wall Street Journal.

We now know that more information does not equal transparency—it often simply muddies things further. Even worse, knowledge that diligence reports will be seen by investors will create incentives for banks and diligence companies to conspire to produce clean reports. A public diligence report would very likely be less diligent than one that can be kept private.

This is not an abstract fear. The pressure to clean up reports already exists for fear of litigation. Everyone who has done this kind of work knows that there are certain things you save for the conference call, the contents of which are far harder to subpoena, request through discovery or conclude. One bank we worked with—in our lives before DealBreaker—regularly requested that no records be kept from diligence and all reports be delivered verbally.

Destroying due diligence won’t save it.

Something’s amiss at UBS. Though the bank was set to pass out bonuses made entirely out of craptastic stock (down 35 percent for the year) and marshmallows today, employees are acting surprisingly calm, almost…too calm. One in wealth management tells us “we’re doing alright…it’s not a bloodbath” and the word from banking and trading is “it’s not the end of the world.” Is it possible that despite blowing a ton of money on worthless (but pretty!) ice sculptures for the holiday party at the Natural History Museum and losing a few billion dollars the other day, the friends o’ the SS aren’t stiffing all on b’s? We’re skeptical. And we remain unconvinced that no one's angry enough to pull a Merrill. Are you planning something? Let us know.

The news that the police have seized French rogue trader Jerome Kerviel's personal computer reminds us of a important rule of criminal behavior: don’t have anything incriminating on your home computer. We’re not just talking about a spreadsheet detailing your phony hedges. Anything that is even embarrassing to you or your friends and family can—and probably will—be used against you by the authorities. Legal culpability or admissibility is no guarantee of safety. Emails about an illicit affair? That’ll end up in the papers. Awkward conversations about a drunken weekend? You’ll be hearing about that on the evening news. Huge collection of music downloads? You're not only a rogue trader, you're a copyright pirate. That'll make the news. The point is to drive the accused to confess, by almost any means necessary.

We can hope that this kind of abusive prosecution might someday be stopped. By hoping isn’t a strategy. Erasing your hard-drive is.

SocGen trader's PC seized from brother's flat [Reuters]

The rule that all business failures become criminal matters is bearing out in the subprime mess. Yesterday we learned of an FBI probe. (Gary Weiss expertly dissects it over on Portfolio.) This morning we learned that New York Attorney General Andrew Cuomo’s office is considering employing the ancient and dreaded Martin Act against Wall Street.

What makes the state law so powerful is that its broad definition of securities fraud doesn’t require a prosecutors to prove intent. It was a favorite weapon of Loathsome Eliot Spitzer when he held the AG’s office. Now Cuomo is looking to use it to show fraud in the packaging of mortgage bonds and derivatives, according to the Wall Street Journal.

“The attorney general's office has issued Martin Act subpoenas, which don't spell out whether matters are civil or criminal in nature, according to people familiar with the matter. So far, the recipients include financial firms Bear Stearns Cos., Deutsche Bank AG, Morgan Stanley, Merrill Lynch & Co., and Lehman Brothers Holdings Inc., possibly among others,” the Journal said.

“When they start using the Martin Act, you don’t run, you don’t hide, you don’t fight. You settle early, and often,” a veteran of an earlier round of Martin Act subpoenas told us.

These investigations can have serious costs for the target banks. Management gets distracted, legal costs skyrocket and settlements usually involve heavy fines. What’s more, the AG office can be much more difficult to deal with than the SEC, and it is much less predictable. Perhaps even more than the SEC, federal prosecutor and FBI investigations, this could spell serious trouble for Wall Street.

State Subprime Probe Takes a New Tack [Wall Street Journal]

Those watching CNBC’s “The Call” circa 11:30 this morning know that Charlie Gasparino lost a bet to Mary Thompson over how big Lloyd Blankfein’s package would be this year, with Melissa Francis officiating. The terms of the wager stated that the loser had to buy dinner at Campagnola. Interestingly enough, No Sleeves claims that he didn’t lose anything, but was simply doing the chivalrous thing that anybody boy worth his Rego Park salt would do, and treating the ladies (his words: “It’s the gentlemanly thing to do, and I am a gentleman”). Bull shit. The fact that said dinner, which came to $412.40, was paid for with a Visa card bearing the name “Gasparino” (expiration date: 09/08) is irrefutable proof that Charlie Gasparino is a terrible judge of size. Anyway. As NS noted, we enjoy chronicling his every move, from “what deli meats [he] eats to where [he] works out,” so obviously we sent Intern Scott to pose as the pepper grinder and take copious notes, as well as the Visa number with which we bought a bunch of shit for ourselves (mostly Italian delicacies filled with nitrates so the theft would go undetected). His report:

- Charlie: Mixed green salad, Dover sole with ketchup (women registered shock and disgust over choice of condiment, and I would agree), steamed broccoli on the side. (Consumption of the salad seemed forced, as though he would’ve preferred another dish but sensed he was being watched)

- Melissa: pasta with some sort of cream sauce (recommended by maître d’ “Frankie”)

- Mary: house salad

- Melissa/Mary: Split a T-bone for 2, home fry potatoes, creamed spinach, steamed broccoli

- Sooprezat on the table, Charlie didn't touch it (odd)

- White wine

- 1 Napoleon, split three ways

- Charlie gave shit to some Goldman guy

- Frankie mentioned that Charlie had been there the night before, and the night before that

- "A lot of pinky rings"

We also have some brief footage of the dinner, after the jump.

The Wall Street Journal has one of those paint by numbers articles today about how it’s inappropriate to dress casually in the office. It’s full of helpful information like “don’t wear ripped jeans that haven’t been washed in three weeks and smell like wet dog” and "Take off your cock ring before you come to work, unless you plan to 'liaise' with your secretary that morning." So it’s not *entirely* useless.

But my issue is that it seems to be addressing idiots. People who don’t get why cargo pants might not be the best choice to roll up to an interview wearing (full disclosure: I don’t either). Toilet cleaners who are just trying to get by without getting fired. And that’s not you, the highly affluent DealBreaker audience that advertisers love. You’re moving up, or at least you’re attempting a vertical climb and since the Journal won’t belay you up there, DealBreaker will. I’m going to tell you a secret someone once told me: talent doesn’t matter. Same thing with initiative and work ethic in general. All that matters is the clothes, and remembering three words: act as if.

Are you a P&L analyst at SAC looking to impress the grand poobah by mimicking his sartorial picks? You wear a zipup sweater, cookie crumbs, no pants. Bottom feeder at Blackstone? Fine Italian suit with bib. Nobody at Merrill? unitard. Interning for Brian Hunter (unpaid, college credit only)? Shroud yourself in a cloak of failure and call it a day. You get the idea. Now, who’s ready to start dressing the part and making a name for himself?

Law Without Suits: New Hires Flout Tradition [WSJ]

Is Bank of America’s acquisition of Countrywide in trouble? You wouldn’t think so if you’re looking at the spread between where the shares of the two companies are trading. The spread between the shares and the offering price has narrowed dramatically in the last few days, from a high of nearly 25% to the current 15% gap.

But today the Monaco-based hedge fund SRM Global Fund filed a 13D complaining that the merger plan does not deliver “sufficient value” to Countrywide shareholders. SRM has acquired a 5.19% stake in Countrywide.

Most commentary on the deal has focused on whether Bank of America might back out. It has been described as a “bailout” and Bank of America’s role as that of a “White Knight.” The idea that Countrywide’s shareholders would balk at the deal comes as a surprise.

SRM seems to specialize in troubled home lenders. They also have a major stake in Northern Rock.

SRM 13D [SEC]
Countrywide merger criticized, BoA names mortgage exec [Reuters]

Credit Suisse is totally not going steady with Bear Stearns. Ruddy Brady Dougan—the Irishman who is somehow chief executive of the Swiss bank—told Credit Suisse bankers at the meeting of the Committee To Run The World in Davos, Switzerland that a deal to acquire Bear Stearns is a “non-starter,” according to Mark DeCambre at TheStreet.com.

But now everyone is awkward about it. Bear spokespeople decline to comment, look away embarrassed. The Swiss aren’t talking either, just staring down at their shoes mumbling about already having plans and such.

Credit Suisse CEO Squashes Bear Stearns Takeout Talk [TheStreet.Com]

Wes: Yo, dude! What did you do this weekend?
JP: Same old shit, man. You know? Chewed some ice, waterboarded myself.

This message brought to you directly from subprime America.

So who is on this list of 14 companies under investigation by the FBI for their involvement in the subprime mortgage crisis? The FBI apparently intends to keep us in suspense because they won’t give details. All we know is that they are looking into “allegations of fraud at various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.”

So let’s recklessly speculate. Two companies that are sure to be on the list are Bear Stearns—which is already under investigation by federal prosecutors and the SEC—and Countrywide, which is both the biggest home loan lender and also facing an SEC inquiry. Goldman Sachs is very likely on the list. It was accused on the pages of the Sunday New York Times of misleading clients by packaging CDOs while shorting the mortgage market. We know that at least one Senator read the article and has been making a stink, and we know that federal investigators often get their leads by reading the paper. What’s more, Goldman Sachs has said that it is cooperating with an unnamed government agency.

Morgan Stanley has also admitted to cooperating with unnamed government authorities. At first, everyone assumed this was the SEC. But why wouldn’t they come out and say that? More likely they declined to name the agency out of fear that saying they were cooperating with the FBI would tar them with serious criminality—rather than the everyday Wall Street shenanigans implied by an SEC investigation.

So that gives us four good leads. Who else is a cylon on the list? No doubt some additional mortgage companies and some home builders. Maybe the ratings agencies are also. Leave your guesses in the comments section below.

FBI Launches Subprime Probe [Wall Street Journal]

Who remembers that Craiglist ad from the 28 year old Goldman banker looking for someone to lavish with his (pretax) $722k bonus? I'm going to go with all of you because, frankly, it/he was unforgettable. The Viking stove, the custom-made oak dresser, the amazing dinners, the shopping, the great wine, the getting each other off fabulously and, of course, the baby's arm aren't things one lets recede from his/her consciousness so easily. Sure, the whole thing turned out to be fake and from the mind of someone named the Cajun Boy who does not really work at Goldman Sachs or at any other financial institution, including Bear Stearns, for that matter, but did anyone give a shit? No, us included. In fact, we were so taken by the imposter-- "real" name: Thad-- that we asked him if we could reprint parts of his journal on DealBreaker so that you all could live vicariously through his fabulous life. He said yes, if it would help him "score ass." So if you enjoy the following installment, show your gratitude.

If there's one thing that I've learned in my life to this point it's that if you want something royally fucked up, leave it to the French. These days I can't seem to go anywhere without someone yapping about Societe Generale and the "rogue trader." I can't even drop a deuce at Megu without the cat in the next stall jabbering into his phone about how the fallout from this shitshow coupled with the rising cost of yacht insurance have left him having to reevaluate the prudence of flying a cobbler in from London to re-sole his John Lobbs versus having the work done locally.

What chaps my sweet bottom most about all of this is that the name of the corner-cubicle dwelling derivatives trading fuckstick that is responsible for all of this is Jerome. In the history of white guys named Jerome, has there ever been a single one that wasn't a complete toolbox? Negative.

I once met a French guy named Jerome. It pains me deep down where the body meets the soul to merely mention his name. In the times when I have discussed him I usually refer to him as "Cockblockus Maximus," for he performed on me what will likely go down in the annals of cockblocking as the Waterloo of cockblocks, only that in this instance, the fucking French won. At the time I was on a first date with what I consider to be the holy grail of banking industry poon.

A "Jasian."

Yesterday Merrill Lynch said that Greg Fleming—the bank’s president and chief operating officer—and Bob McCann—who heads the brokerage business—would not receive bonuses for 2007. This decision was made by the board of directors on Monday, according to a filing with the Securities and Exchange Commission.

Zeroing out executive bonuses has become something of a trend on Wall Street. Bear Stearns and Morgan Stanley have made similar moves. But before you weep for Fleming and McCann you should read the fine print. Both men received their base salary of $350,000 as well as "retention options."

The real story here, however, is taking place more quietly and behind the scenes. Newly minted chief executive John Thain is working to dismantle some of the institutional hierarchy of Merrill, flattening the leadership structure and having more executives report directly to him. This is widely seen as effectively demoting Greg Fleming—who, for now, still holds the title of President of Merrill—who will no longer be a gatekeeper through whom more junior executives report to the chief executive. There has been some talk by insiders that the unwinding of the hierarchical structure that grew under Stan O’Neal has some executives bristling that they are losing rank and authority.

Yesterday Thain told investors that Merrill is exiting the collateralized debt obligations and structured credit businesses.

Merrill executives received no bonuses for 2007 [Reuters]
Merrill Lynch Filing [SEC]

Derivatives Write-Downs Hit MBIA (WSJ)
Just so you can keep tabs, MBIA lost $2.3 billion, as it took a quarterly writedown of $3.5 billion. The good news: without the writedown, MBIA is making a lot of money. $1.2 billion to be exact. And as typical for these things, the company also closed another $500 million stock sale to Warburg Pincus, as part of its previously announced agreement. Apparently, the company felt folks needed a lot of time to digest the news, since they put the release out just after midnight.

Starbucks axes sandwiches as part of fix (AP)
This is interesting. As part of its re-invention plan, Starbucks plans to eliminate sandwiches from its stores. You know, it's all about returning to its java roots. It's not that people aren't buying them though. They reportedly get each store about $35,000 in annual revenue, around $100 per day that works out to, but we're guessing that on the bottom line, they're not all that. Maybe it's time to install sushi bars.

Isuzu pulls plug on its auto sales (Bloomberg)
Isuzu is getting out of the US auto game, going the way of Mitt Romney's Dad's company. The company said it was hurt by a decision from General Motors to stop manufacturing one of its SUVs. That's too bad. We're going to miss those Joe Isuzu ads on TV. They're funny. No, in all seriousness, we recall a few years ago some chatter about bringing that guy back. What happened to that? The company will still do auto parts.

Something New To Worry About: China’s Snowstorms (TechTraderDaily)
That snowstorm we mentioned yesterday, in China, turns out it's really got people concerned. Some crazy stats: 107,000 buildings collapsed, 42 billion square acres of crops destroyed. And apparently companies are already blaming weak performance on the storm. It'll be like El Nino is here. If you've got weak performance and it happens to be an El Nino season, then you get a little bit of extra credit.

$$$ New Fed Policy: 'No Rogue Trader Left Behind' [Jeff Matthews]

$$$ Jerome Kerviel (almost) did what brother Olivier could not. [Telegraph]

$$$ The Big R [WallStrip]

Well that rally didn’t last very long did it?

The word that FGIC Corp's bond insurance arm was downgraded by Fitch today certainly didn’t help things. Not that this was totally unexpected. We predicted a downgrade today in a post early this morning. Charlie Gasparino was talking about this on Wednesday.

Fitch cut FGIC's "AAA" insurer financial strength rating by two notches to "AA.” But further cuts may be in the works, as Fitch kept FGIC on negative credit watch.

FGIC has insured about $314.8 billion of outstanding bonds, making it the fourth largest bond insurer according to Reuters.

Bloomberg breaks it down for us: "About 71 percent of FGIC's guarantees are on municipal bonds, 23 percent are structured finance and 6 percent are international transactions, according to the company's website. FGIC guaranteed $21 billion of home-equity securities, $8.8 billion of subprime mortgage debt, and $10.3 billion of CDOs backed by subprime mortgages and other loans, the Web site shows."

That’s a relatively low ratio of structured finance bonds to safer public finance bonds. Far lower, for instance, than the 36% structured finance at MBIA. This limited exposure to structured finance could limit the damage to banks that have purchased insurance from FGIC. But it also shows that Fitch was willing to cut the insurer despite ongoing talks of a Wall Street bailout, which could mean trouble for larger bond insurers and their customers.

Fitch cuts "AAA" rating of FGIC insurance unit [Reuters]
FGIC Loses AAA Rating at Fitch After Missing Deadline [Bloomberg]

A few weeks ago we reprinted a compilation of Tim Sykes’s hate mail, which he’d forwarded to us completely altruistically besides for the request that we link to his website. There were many gems. Many ad hominem attacks. Many instances of out of the box type insults (my personal favorite: “If I fed you rat poisoning, how long do you think it would take for you to die?”). Then we dared you to do better. None of you did. The latest batch of hate mail is horrible. Flat out sucks. You need to carry your weight, do your duty and push Sykes down—in a strange way, the emails are like the ‘dunk the clown’ stand at the carnival, and you’re to hit the very small target that would register with this idiot and potentially sink his incongruously large ego. There was one message that stood out from the pack in that it sucked slightly less than the rest. It was pithy, and it had a numbered outline differentiating insults. The rest: step up. Those who didn’t email at all: failing grades.

Talk of recession is everywhere. The Fed is cutting like a barber above a pie shop. Consumer confidence is sinking, spending failing to keep up with spending power. You can’t read a Fed statement without coming across worries about the credit crunch. You’d think that we might see an increase in defaults for leveraged loans that fueled the buyout wave that crested last year.

But you’d be wrong. The leverage loan default rate is at the lowest rate in years. We ended 2007 at a 10-year low of 0.1 percent for Moody's-rated issuers, down from 0.6 percent in 2006.

So what’s going on? Are companies saddled with debt are simply especially healthy right now? Not very likely. What’s holding down the default rate is that it’s so hard for a company to breach a covenant these days these days, according to Reuters Jonathan Keehner and Megan Davis. In fact, it may be hard even to find a covenant that can be breached short of total collapse.

“The problem is that the most recent round of dealmaking partly removed a canary in the coal mine traditionally used by lenders to signal when a deal was in trouble,” he writes.

Lending agreements from the buyout boom had such loose conditions that some were dubbed "covenant lite" because they lacked traditional default triggers called maintenance covenants. Those covenants track a borrower's ability to meet financial obligations.

Historically, a company that issued leveraged loans would break a maintenance covenant if it ran into liquidity trouble, said Kenneth Emery, who directs Moody's corporate default research. Lenders would then be alerted to the situation early and could take corrective action, like selling assets, changing management or pushing the company into bankruptcy, according to Emery.

But without such strict covenants, the default rate could react less to liquidity issues at newly private companies -- which may be at higher risk in a recession due to the debt load that often accompanies a buyout.

So companies can run into trouble and keep running without tripping covenants, and lenders may not be able to get them to the table until a lot of value has been destroyed. In short, the lower default rate may also lead to a lower recovery rate for lenders.

LBO companies' health could be worse than it looks [Reuters]

Well, the 47.5% minority of those polled at DealBreaker got it right. The Fed announced a cut of 50 basis points in the target rate and the discount rate, meaning we've seen 125 basis points slashed off the Fed Funds target rate in the last week or so. As far as we can remember, this has never happened.

There will be some who wonder whether or not the Fed is misreading economic and market conditions. It notes that credit has tightened despite the easing of the commercial paper market, the refinancing jump in mortgages and a lower LIBOR. Still, it's the cut that market wanted. Stocks jumped, bonds and the dollar declined. What was that we were saying about converting the dollar into a gift card with a short expiration date?

One thing that's clear is that the Fed has become a lot less predictable, at least on any long-term basis. Two weeks ago, the chances of a 50 bps cut barely registered in the futures. And since then they've jumped all over the place. So it seems that the market isn't sure what the Fed is going to do week to week. Or perhaps it's the Fed that isn't sure.

The full statement after the jump.

Sailfish Capital Partners is blowing up, according to the hedge fund experts at FinAlternatives. Yesterday the traders at the Stamford based fund were ordered to begin liquidating its entire portfolio as quickly as possible.

The trouble began when the two partners, Mark Fishman and Sal Naro, got into a shouting match yesterday. At the conclusion of the argument, they ordered the traders to start reeling in their positions.

“They told everyone to start selling their positions, to liquidate,” a source tells FinAlt. “It’s basically blowing up. Everyone is sending out their resumes. They want out. It’s basically mayhem.”

A spokesman for Sailfish dismissed the notion that there was a fight, describing the event as a “discussion.”

Redemptions are due tomorrow, and many investors are reportedly taking advantage of this date to pull their money. The fund saw major redemptions in October. It has been plagued by rumors of an implosion and employee dissatisfaction for several weeks.

Traders At Hedge Fund Sailfish Ordered To Liquidate Positions [FinAlternatives]

Mary in Indianapolis is a fifty year old single mother dealing with a deadbeat ex-husband who doesn’t pay child support and whose “financial incompetence” is about to drive their home into maybe forclosure*, which Mary is paying for because her name is on the mortgage, even though she’s living elsewhere and he’s shacked up with some floosie. Here’s the thing , and the thing’s two-fold. 1. I shouldn’t be laughing at this because this woman’s obviously going through a difficult time in her life, and, to be honest, there’s something oddly endearing about Dave of “The Dave Ramsey Show,” perhaps the soothingness of his voice, or the way he refers to himself as Mary’s “financial advisor” and to her as his “little sister” but 2. Angelo R. Mozilo woman! Are you seriously calling Fox Business for help here? Why don’t you just ask Jesus what he thinks you should do? He’s always been good with this kind of stuff. Or better yet, give Lon Varney a call. He’s not in the office right now, but try him on his cell:203-890-2000. I’m sure he’ll be able to get you out of this pickle.

*She thinks, she's not sure.

That’s the question raised yesterday by Deal Journal’s Heidi Moore. Her suggestions:

Tom Cruise - of whom Kerviel’s Paris neighbors say he is a lookalike. But we think Paul Rudd–the romantic love interest from the classic film “Clueless”–wins the resemblance sweepstakes hands-down. Ed Norton, former boyfriend of Francois Pinault’s wife, Salma Hayek, has played men who make things disappear. Patrick Dempsey has the mop and the puppy-dog eyes.

We love this game. At first, the only suggestion the entire DealBreaker Bunker came up with last night was Charlie Sheen. But he already played this role back in Oliver Stone’s Wall Street. And we’d want that Sheen anyway, not Charlie from 2 ½ Men. Scratch Sheen, then.

Then a revelation came: Liev Schreiber should play Kreviel. He was brilliant as Richard Roma in the production of Glengarry Glen Ross a few years ago. He’s got what the New Yorker once described as an “uncanny instinct for isolating the frightened, frail, goofy parts” of characters. And when we saw him in Talk Radio he smoked up a storm, which means he can definitely play French.

Who Would Play Jerome Kerviel in the Movies? [DealJournal]

Update: Now the Telegraph is in on the game too.

There’s a shocking story in today’s Post about how Countrywide’s Angelo Mozillo said the company would be profitable in the fourth-quarter and—HOMG—it wasn’t. An investor in Georgia is “a little bit disappointed” that he lost $3,200 and a lot of people are just plain hurt that they were taken for a ride (in AM’s red Iroc, whose plates read: ‘mohazard’). The shocking part is that the paper is supposedly surprised that Mystic Tan man would lie about the mortgage lender’s outlook, even though it’s been established for some time that Ang. would, in his own words, “screw you for a nickel, or a used tanning bed and some UV goggles.” We’d expect this sort of bright-eyed innocence from Andrew Ross Sorkin or Don Klarney but the Post? You guys are supposed to be better—and more versed in jabroni—than that. Oh well. You know we can’t stay mad at you for too long. Not when you’re turning out graphics like that.

No Bottom Yet [NYP]

Jim Cramer announced on a "Wall Street Confidential" segment today that he's renouncing tech, which tech must really be beating itself up over, the loss of Uncle Jimbo's support. Why is he turning his back on a sector he previously shilled for like Alfonso Reibera for Pepsi? Well, he's "frustrated" with it. It's the only cohort where you get a good earnings per share number and the stocks do nothing or go down, it's the worst risk-reward in the game, no "pizzaz," no new product cycles. The disappointment of VMware, blah blah blah let's just cut the bullshit. The real reason Cramer is suddenly saying he was wrong about Tech is that he read a piece from this very website earlier this morning in which the author said he agreed with the bobblehead and it's just been constant waves of revulsion pulsating through his body ever since. Those close to him say that Cramer has put in motion a two part cleansing process (which he'll discuss on "Mad Money" later today).

Step 1: take back anything he's ever said about anything ever

Step 2: ritual suicide on Fox Business (pay-per-view perhaps, though the particulars are still being hammered out).

Earlier: Street.com Correspondent Gets First Date As Result of iPhone

Cramer Throws in the Tech Towel [thestreet.com]

Just in case you missed it last night, we're bringing the reader poll on today's Fed decision back to the top of the page. There's about an hour left to vote for this before we shut down the poll and start gearing up to cover the aftermath.

Wrangling over a plan to bail out troubled bond insurers is inviting a downgrade by ratings agencies, according to source familiar with the discussions within one of the agencies. New York state insurance regulators have asked the agencies to postpone a downgrade while they work out a plan with Wall Street banks but a flurry of news stories have suggested that the participants in this discussion have not agreed on a plan and may be hesitant to fund a bailout.

"The story in the Journal this morning may be the last straw. It shows that there is no plan, and it sounds like not much progress has been made," the source said.

This morning the Wall Street Journal reported that as many of three plans are being discussed. It added that there was no consensus that a plan was even needed or how it would be paid for.

The ratings agencies are concerned about their credibility. They have come under fire recently for failing to spot troubles in the mortgage market and its effect on many derivatives. They are now loathe to be seen holding back at the request of regulators. Yesterday Charlie Gasparino reported on CNBC that a Moody's spokesman had told him "we don't forbear on our ratings" based on talks with government officials.

Also contributing to the likelihood of a downgrade this week has been the lack of involvement by the Treasury Department or the Federal Reserve. New York State insurance regulators do not have the prestige or persuasiveness that higher level involvement would, according to the source.

A downgrade could come this week, perhaps as early as today, the source tells DealBreaker.

Good Plan, but Who Will Pay? [Wall Street Journal]

What a difference a day makes. Just two days ago, DealBreaker's reader poll revealed an almost even split between those who thought the Fed would today announce a 50 basis point rate cut and those predicting a 25 basis point cut. The 50 bps cut had a slight edge, in fact.

Late yesterday we began a new poll asking about the cut, and it shows a dramatic shift in sentiment. The 25 bps cut now leads decisively, garnering support from 58.2% of responding readers. Good economic news, perhaps coupled with suspicions that last Monday's sell-off and subsequent emergency rate cut was sparked by SocGen selling off positions by their allegedly rouge trader, seems to have persuaded many readers that the Fed cut won't be as deep.

Others have begun to argue that the Fed won't cut deeply today in order to preserve some dry powder for later cuts.

"Bernanke has the choice of give his all (meaning 50 to 100 bp) and seeing the market rise briefly, then fall under the weight of ongoing reality. Or he can do 25bp, and watch the market fall," Finn of the Blax Alternate blog argued in comments. "With the small cut, he can save face and and say, 'Well, we could have propped the market if we wanted to, but are being responsible' (all the while praying the market rises). With a 50bp cut or more, he basically tosses all his power into the ring, only to demonstrate to all that the Fed is powerless (as well as desperate, and foolish)."

Becky Quick made a similar argument this morning on Squawk Box.

This shift occurred prior to the release of data this morning showing that the the U.S. economy slowed sharply in the fourth quarter of 2007. Gross domestic product rose at a seasonally adjusted 0.6% annual rate October through December. These numbers were likely available to Ben Bernanke yesterday, and so may have already played a role in the FOMC's rate cut discussions.

We hear that Cowen & Company has quietly been making cuts to its investment banking units. Like many financials, shares of Cowen & Company have suffered tremendously in the past year. It is down 52% over the past 12 months, worse even than Bear Stearns. A source told DealBreaker that the investment bank had cut several bankers in their consumer division a few weeks ago. Further cuts have also been made in the healthcare group and bankers in the technology group have been quietly informed they should begin looking for new jobs, according to the source.

Cowen & Company could not immediately be reached for comment.

Important Update: Further news arrives on the folks let go from Cowen & Company. According to another source familiar with the matter, the people shown the exit were very junior people who were let go because they were not performing up to expectations.

Also, some readers have protested that this item implied a direct connection between the price of the stock and the layoffs. Perish the thought. We intended no such thing. But we did believe that readers would be interested in hearing how C&C's stock was doing these days.

China Snow Crisis Shows Vulnerability (AP)
This isn't a metaphor. The China snow crisis is just that, a crisis about snow. As in the cold white stuff that we've had none of this year. Apparently certain parts of the country are getting hammered, leading to all kinds of supply chain issues and shortages of food and fuel. Just like our politicians, the Vice Premier has "repeated calls" on coal deliverers to make sure gets delivered. And we thought only politicians that had to run for office "repeated calls".

Yahoo Profits Fall 23%, Cuts 1,000 Jobs (InformationWeek)
Investors were expecting a weak forecast and layoffs and that's what they got from Yahoo. There were probably some people holding their breath, hoping for some sort of shocking, out-of-the-blue surprise, but no. The company is still in shift mode, changing its strategy, realigning, repositioning itself, etc. And it sees "headwinds" this year, which means it's flying perfectly, but outside forces on which it has no control are slowing it down. Right.

The Bond 'Transformers' (WSJ)
Who says government is pure reactive? Well, they'd be right. And who says regulators often foolhardily attempt to fix complex problems with simple, band-aid solutions? Well, they'd be right too. New York regulators are, get this, looking to close a "loophole" that allows bond insurers to dabble in derivates. Great timing on that. You can read the details here, but the point is, it's pretty rich timing, with the bond insurers knocking on heavens door to start thinking about if they could've done business in some safer, more transparent manner.

A Dose of Realism for VMWare (MarketBeat)
After delivering some disappointing numbers on Monday night, VMWare got crushed yesterday, falling over 30 percent. The bloom, as they say, is off the rose. MarketBeat looks at the new sentiment towards the once-hot virtualization company. Funny how things can change overnight. Suddenly, it's just another enterprise IT play clawing it out for a chunk of scarce dollars.

$$$ This is by far our favorite thing of the day: YouWalkAway.com.

$$$ Barry Ritholtz says farewell to Ben Stein.

$$$ Jerome Kerviel: French National hero?

$$$ Anyone care to venture a guess how early Rudy drops out of the race and endorses McCain?

$$$ Mentors and Strategies [MM]

$$$ Here's the 74 billion question: Was the Fed's decision to cut rates last week the indirect result of Kerviel's unauthorized $74 billion in trading positions, which SocGen was furiously unwinding on MLK day? Bonus round: has the realization that it was one bank's unwinding made a deep Fed cut less likely tomorrow?

$$$ The question is, why wasn't Charlie Gasparino quoted in, or at least consulted for, this story? [thestreet.com]

$$$ SocGen: C’est Le Takeover Time? [Deal Journal]

Following this morning's economic reports the widely expected 50 bps cut from the Fed became a little less widely expected, with the futures showing a drop from 86% to 72%. An internal poll at Morgan Stanley, however, showed the opposite, with 73% of respondents predicting only a 25 bps cut, according to an email sent to clients this afternoon.

Our own polling, which had over 1,700 respondents, showed almost an even split between a 25 bps cut and a 50 bps cut. No other position got a significant number of votes. So we’re asking again, with just two options.

One thing you can always count on is that as geographic scope of businesses and finance grow, someone will call for the harmonization of the relevant legal and regulatory structures. Roger Ehrenberg blasts that familiar horn today, calling for "common regulatory frameworks" in order to minimize regulatory arbitrage and cut down on the "immense friction [involved in] operating regulated businesses across markets due to different rules and standards.” Felix Salmon applauds him, and calls for even more of the same. Somehow this is meant to be a lesson from our current credit crisis.

This is a terrible idea. Competing, conflicting regulatory frameworks may not be as efficient as an ideally-designed comprehensive system but it avoids many of the mistakes and oversights of the kind of harmonized regulatory framework we are ever likely to get. The availability of exit and avoidance, experimentation and local checks on corruption and capture are under-rated sources of regulatory strength. A harmonized system with do away with the nimbleness we praised earlier, and there’s little reason to suspect we’d get a system better able to catch abuses, fraud, waste and errors than that we have now. Less abstractly, if none of the regulators saw our current credit crisis coming, how would having a common framework have helped them avoid it?

We wrote about this ages ago in the context of European takeover law, and what we said still applies: let a thousand regulatory regimes bloom.

What has the Credit Crisis Taught Us? [Information Arbitrage]
Dreaming of Regulatory Cooperation [Portfolio]

We’ve been trying to get in touch with people who knew Jerome Kerviel but the guy seems to be one of those “kept to him over the weekend at Societe Generale. Right now he’s just a name, a face, an accusation, a denial and lots of speculation. We want to find out who he was.

In case you’ve been too busy to notice, Kerviel is just about the most famous name in finance right now. He’s accused of causing a $7 billion loss at SocGen. After a brief period where it seems he may have gone fugitive, he turned up in Paris. After questioning by police it emerged that he admitted to placing the trades but denied any fraud was involved. The court released him on bail and declined to press fraud charges.

Now there are serious questions about what SocGen knew and when about Kerviel’s trading activities. There’s a widespread suspicion that if Kerviel’s trades were exactly authorized by the bank, it may have turned a blind eye to his risky trading. At some point he seems to have been able to make trades totally as much as ten times the losses the bank suffered. How did that happen with no-one noticing? The European futures and options exchange apparently raised questions about Kerviel’s trades back in November. What’s more, as we first learned from our commenters, Soc Gen’s panicked dumping of Kerveil's positions seems to have worsened the losses.And now, of course, everyone is speculating that Soc Gen might get sold to someone.

We want to avoid all this "lone trader" and "nice boy who kept to himself" stuff. But it's damned hard when no-one even seems to remember him. The more questions we ask, the more it seems he really was a loner desperately seeking acceptance and a way out of his congenital anonymity. It freaks us out to watch a cliche come to life.

Jim Cramer announced on a "Wall Street Confidential" segment today that he's renouncing tech, which tech must really be beating itself up over, the loss of Uncle Jimbo's support. Why is he turning his back on a sector he previously shilled for like Alfonso Reibera for Pepsi? Well, he's "frustrated" with it. It's the only cohort where you get a good earnings per share number and the stocks do nothing or go down, it's the worst risk-reward in the game, no "pizzaz," no new product cycles. The disappointment of VMware, blah blah blah let's just cut the bullshit. The real reason Cramer is suddenly saying he was wrong about Tech is that he read a piece from this very website earlier this morning in which the author said he agreed with the bobblehead and it's just been constant waves of revulsion pulsating through his body ever since. Those close to him say that Cramer has put in motion a two part cleansing process (which he'll discuss on "Mad Money" later today). Step 1: take back anything he's ever said about anything ever Step 2: ritual suicide on Fox Business (pay-per-view perhaps, though the particulars are still being hammered out).

Earlier: Street.com Correspondent Gets First Date As Result of iPhone

Cramer Throws in the Tech Towel [thestreet.com]

It’s the new MLEC. And it’s probably not going to work out. Willbur Ross is not about to buy up Ambac. But, hey, everyone can be happy because Warren Buffett is riding to the rescue.

There’s little in Countrywide’s earnings announcement that seem likely to shake Bank of America from its desire to own the home lending giant. Indeed, shares of Countrywide moved up this morning and the merger arb gap narrowed to 80% or so, implying that traders are getting more confident the deal will eventually close.

This morning the Wall Street Journal carried an interesting article that claims to explain why Countrywide agreed to sell out to Bank of America. Pressure from ratings agencies and regulators threatened to end the way Countrywide did business, the article claims, and this drove the mortgageer into the arms of Bank of America.

But to really understand the article you have to read it backwards, like a teenager spinning a record backwards to hear the hidden demonic exhortation. The real story here is how the government has been funding Countrywide by lending it money through the Federal Home Loan Banks system and guaranteeing deposits in its CDs through the Federal Deposit Insurance Corp. Countrywide CDs had enormous interest rates, and those government guarantees allowed depositors to derive risk free yields of more than 5% in recent months. As those deposits grew, so did its ability to borrow through the FHLB, which allows borrowing on up to 50% of a home loan banks deposit assets.

In short, these government programs allowed Countrywide to escape the discipline of the marketplace for several months. And it was only recent attention from lawmakers and regulator that cast doubt on the willingness of the government to continue these subsidies.

Countrywide Deal Driven by Crackdown Fear [Wall Street Journal]

In the demonological pantheon of the subprime crisis orthodoxy, the deepest level of hell are reserved for unscrupulous lenders. Uncreditworthy borrowers live at a slightly higher plane, nearby unvigiliant regulators. But the cant and caterwauling of the orthodox overlooks that much of the world was focused on quite different concerns before the mortgage bills for the ownership society came due.

Despite our best efforts, we’re still cursed with a memory that reaches past this morning’s headlines. We cannot forget that the problem with the CDO market was supposed to be insider trading instead of the weakness of the underlying financial assets. And it was meant to be hedge funds that posed a systemic risk to the financial system rather than our venerable investment banks, money centers, trading houses and brokerages. The great accounting scandal was backdated stock options rather than marked-to-model financial products. In short, all the heat and light generated by our various guardians was aimed in the wrong direction.

Yet so strongly held was the belief in the old orthodoxy that, if you listen closely or read the New York Times business section on Sunday, you can still hear those who wonder whether or not insider trading or hedge fund manipulation is somehow behind our current troubles. There is not much evidence of this, as SEC Commissioner Paul Atkins pointed out recently.

“Although we and our counterparts in government are monitoring and looking into the origins of the events of the last year, it does not seem that hedge funds were the origin of the subprime problems,” Atkins said. If anything, some hedge funds and their investors seem to have been the first casualties of the current debacle rather than the causes.

We don’t mean this as a criticism of those guardians. Rather, it seems to us an indication that the actual risks in our innovative financial world are difficult to detect and that none of our journalistic and political institutions are particularly well-adapted to early detection. What we need is modesty in forward looking, crisis-avoiding regulations—often we may be aiming our resources where they are not needed, and diverting our attention from where they are. As the fellows at Goldman used to say, since we can’t tell where things are going, we’d best stay nimble. There’s a very good chance that once again the orthodoxy is hunting down imaginary demons.