Andy Kessler

NPR: Navigating Wall Street's Lexicon

http://www.npr.org/templates/story/story.php?storyId=96557570
1:02 mark
"The last fund manager or the last set of individuals out in the marketplace, have they given up hope, have they just said, 'you know what, sell everything,' and just en mass, people are  puking out stocks, that would be capitulation, that is what forms a bottom."

Chris Arnold, NPR: "Nice image."

WSJ: What Paulson Is Trying to Do

http://online.wsj.com/article/SB122402984044334627.html
Less than two weeks into it, the $700 billion Troubled Asset Relief Program (TARP) is stuck between a rock and a hard place. Next week, several hundred billion dollars of credit default swap (default insurance) payments on Lehman's debt default are due. No one quite knows who owes what and if they're good for it. Hence the urgency in Henry Paulson and Ben Bernanke's plan to inject $250 billion directly into bank balance sheets, which seems a necessary evil to get capital to the right place and help weaker banks save face. The credit markets agree -- so far.

Wall Street and banks live by short-term loans. But as a loan shark might say, right now, nobody wants to lend to nobody. The rate that banks charge each other, the London Interbank Offered Rate (Libor), has been trading so high above three-month Treasury-bill rates (on Monday it was 4.75% vs. 0.11%) that no one is lending. This so-called TED spread -- the difference between what banks pay and what the Treasury pays to borrow for three months -- signals the health of credit markets and has rarely been over 1% since the 1987 crash. The Treasury is clearly focused on this metric and needs to get it down to historic spreads. First it has to change the current mentality of "who wants to lend to the next Lehman or Wachovia?"

The original TARP plan was to buy all the bad loans, mortgage-backed securities and collateralized debt obligations (CDOs) currently weighing down bank balance sheets. That is still the right (and profitable) thing to do. History shows that well-capitalized banks eventually do lend since hoarding doesn't make money.

But here's the current dilemma: If Treasury pays more than market price for these distressed securities, it would look like a taxpayer gift to Wall Street. That's politically unfeasible. So Treasury has to pay the current distressed prices. (Despite this week's stock-market bounce, prices are still dropping on toxic CDOs.) But if Treasury pays current, fire-sale prices, it would lead to major write-downs at banks. Since most of these securities are collateral for other loans, and regulators force banks to have minimum capital requirements and cash on hand, any write-down in value immediately means new capital needs to be raised.

Is this the right thing to do? Probably not…But it's the only thing to do at this stage.

And then who would throw good money after bad? Sovereign wealth funds have already been burned. Dubai invested in Citigroup less than a year ago via preferred shares that convert into Citi stock at $32 to $37 per share. Citi is now around $18.

Other banks are still scrambling. Morgan Stanley's shares bottomed under $7 last Friday on fears that Mitsubishi UFJ Financial Group, a Japanese bank with $1.8 trillion in assets, would pull out of a previously announced deal to buy 21% of the company for $9 billion. Luckily for Morgan Stanley, the Japanese think long term and did the deal anyway, even though it makes no economic sense at the moment. Other U.S. banks wouldn't be so lucky.

So here we are with no interbank loans and no equity financing. Treasury would bankrupt banks if TARP buys securities at market prices, forcing them to do the impossible task of raising capital in an ugly environment.

The direct capital injection is a way to get unstuck. In effect, first Treasury injects money into bank's balance sheets, then buys the toxic loans at market prices. Even if there are write downs, banks will have enough capital to live. What about healthy banks like J.P. Morgan, Bank of America and perhaps Goldman, which don't need capital? They get it too. The Treasury is forcing every top bank to take the government investment. Why? Because if they didn't, the ones that do take the capital would look weak and loans to them would remain dry.

Is this the right thing to do? Probably not. Despite some limits on compensation, bad management stays in charge. Government investment in financial institutions will raise a gazillion temptations and conflicts of interest. Politicians won't be able to help themselves and will inevitably meddle. Just look at the pork loaded into the TARP bill. But it's the only thing to do at this stage. Next stop is full nationalization and no one wants that. Already the TED spread is coming in, dropping to 4.36 from 4.64. The market likes the plan, at least for now.

One concern: Won't cranking the monetary printing presses to finance all this lead to runaway inflation? Probably not. Remember that after the 1929 market crash and subsequent bank runs, 10,000 or roughly 40% of banks failed, $2 billion in deposits were wiped out and 30% of the money supply disappeared. So did a similar percentage of GDP. Today, bank deposits are mostly safe, but with $1 trillion in bank and Wall Street writedowns taken or soon to be taken on bad real estate securities, some multiple of that in money supply will vanish with the stroke of an accountant's pen. Restarting bank lending is the only way to top it back up.

Many questions remain: When will Libor rates and the TED spread go back to normal so lending can restart? Then, when does the government sell the preferred shares so we can return to a market economy? Can we put an expiration date on government programs? (Most New Deal institutions are still around.) Furthermore, what do we do with the returns on investment?

Thanks to deposit insurance, there are no huge bank runs going on. There is, however, a "loan run," meaning no one will lend to weak banks. Yes, it's distasteful for government to own any private enterprise, especially in finance. But if you hold your nose, the new TARP seems like a way to end this loan drought. There is no economy until this is fixed. Then we can start arguing about the inevitable reforms to come.

Forbes.com - New Life

Thank you, sir, may I have another? As the stock market gets spanked,down 40% in a year and a day, there is a silver lining. We Americans get our lumps out the way, and start a new life. Much has been made of the "mark to market" rule and its role in the credit crisis, but it probably has saved us from 10-plus years of gloom and doom.

Mark to market just accelerated the inevitable, the write-down of bad loans.

Google the number 157 and the first result that comes up is the Financial Accounting Standards Board (FASB) statement on fair value measurements. It's way too boring to read, but what it says is that if a bank or investment bank has a security that trades at 62 cents on the dollar, you have to carry it on your books at 62 cents on the dollar. Pretty simple. You may think it's worth more--well, of course you do, or else you would have sold it, dummy--but the market says it's only worth 62 cents, so quit arguing.

The problem is that many markets, especially those for the now-toxic mortgage-backed securities and collateralized debt obligations (CDO), are thinly traded. This means, the argument goes, that they don't reflect true value. Devious evildoers can set the price wherever they want it. And since these securities are the collateral for short-term loans that the entire financial system is built on, they are subject to manipulation.

Like this: A hedge fund shorts a bank stock, then bids down the thinly traded value of an AAA-rated CDO, a collection of mortgages from, say, the second half of 2006, which is sitting on the books of said bank. Because of FASB 157, the bank has to "mark to market" at the lower price, write down the difference as a loss and raise more capital, and its stock goes down as previous shareholders get diluted. It's one of the reasons the Security and Exchange Commission halted shorting financial stocks, a Band-Aid on a bigger problem.

Well, boohoo! They shouldn't have owned these crappy securities in the first place. Mark to market just accelerated the inevitable, the write-down of bad loans. For the system as a whole, it is always better to take your lumps post-haste. Get it out of the way. Dow down 45%? So what? It was going to drop that much anyway, and one fell swoop beats the Chinese water torture--drip, drip, drip--of a decade of daily declines. And yes, even if it means losing a few companies.

For me, even a flawed market price is better than no market price at all. On paper, Wachovia  has a book value of $75 billion and is being bought by Wells Fargo  for maybe $15 billion. Not sure exactly what they're marking to.

To better understand a world without mark to market, go read Gillian Tett's 2003 book Saving the Sun. A quick summary: Japanese banks made all sorts of horrendous loans in the 1980s. Many, and maybe most, of the loans stopped paying interest after the Japanese bubble burst in 1990. Banks' balance sheets were stuffed with non-performing loans (NPL). Instead of writing them down, marking to market, they just sat there gathering dust on their books. The banks stayed in business, but stopped writing new loans, the result being Japan's Lost Decade. By the late 1990s, the Nikkei 225 index had basically dropped by half.

Anyway, one Japanese bank, Long-Term Credit Bank, finally collapsed in 1998. The Japanese government allowed an American buyout firm, Ripplewood, led by J.C. Flowers & Co., to come in, buy the bank, rename it Shinsei (or New Life) and write down as many NPLs as they could with the government taking the loss. This was around 2000. The bank started lending again and generating profits. So successful was this deal that Shinsei went public in 2004, clearing a $6 billion gain for Ripplewood.

It may have been catastrophic if, like Lehman Brothers  in 2008, Long-Term Credit Bank had failed in 1991, with reverberations throughout the Japanese financial system and probably the world. Their stock market may--would--have crashed, dropping, uh, 50%. But the government could have bought the bad loans, recapitalized the banks themselves and not lost the last 18 years of global growth to China.

So as hard awful as a Dow dropping like a safe onto Wall Street and Main Street is, cheer up. It's almost over. The gunk is getting cleared out. No pain, no gain.

By the way, as a not-quite-amusing epilogue to the Shinsei story: Like many other banks around the globe, it was buying subprime securities over the last few years. Late in 2007, J.C. Flowers had to put more money into the bank to shore up its finances. Maybe this time they will do the write-downs a little quicker. New Life, indeed.

New York Magazine: Why Wall Street Will Prevail

Why Wall Street Will Prevail
Things are bad now, but the world will never out-finance us.

http://nymag.com/news/intelligencer/51168/

With the stock market tanking and Wall Street’s top firms either vanished or trembling under the skirt of commercial banks, is finance as we know it over? Will the Credit Crisis of 2008 turn New York dominance into submission—to London, Shanghai, Dubai, or even Moscow?

Not a chance. First, globalization has proved itself out. Some schmuck defaults on his 3,000-square-foot exurban dream home, and Fortis Bank in Belgium gets nationalized. It wasn’t just Wall Street buying stupid toxic securities—everyone was. Right now, nearly $200 billion is trying (unsuccessfully) to prop up Russian markets, hundreds of billions of euros are trying to resuscitate European banks. Wanna bet over/under on Chinese financials next year?

Second, when you think of markets, remember this saying: Money sloshes around the globe seeking its highest return. You would think that it ought to be sloshing away from the U.S. But it isn’t. If anything, it’s sloshing toward us, buying into the safety of U.S. Treasuries. So much so that they’re sold out. Short-term rates are almost negative. The dollar has been on a tear against all but the Japanese yen. Weird, I know, but we are the port in the storm, even though the storm started in this port.

Third, we make valuable stuff. One cause for alarm, even before the financial meltdown this year, is that the U.S. has gone from around a third of world economic output to something closer to a quarter, at the same time that the BRIC (Brazil, Russia, India, and China) have doubled their share to about 16 percent. But that doesn’t tell the whole story. It’s not so much what your output is, it’s how much you profit doing what you do. The Chinese make us stuff at very low profits, while India answers our customer-support calls. Apple makes more money selling iPhones than any subcontractor in these two countries. And a rising Russia was based on over $100-a-barrel oil, probably a thing of the past, with perhaps a similar future for Brazil’s output of less and less valuable sugarcane and soccer players.

Sure, China and South Korea and the entire Middle East sheikhdom community are sitting on trillions of our dollars, from years of reckless trade and fiscal deficits. But it’s not where the money sits that’s important—it’s what you do with it, where you turn it into more. The U.S. is the largest-valued market, with the most wealth: approximately $50 trillion in financial assets vs. $30 trillion in the eurozone and maybe $2 trillion in China. Innovation remains America’s biggest export—in the form of software, network equipment, pharmaceuticals, search engines, and the next wave of funky energy products—and productivity is the only thing that leads to long-term wealth. Wall Street is not the stock market; it is the gatekeeper for great and future great companies that want to tap it for growth capital. Oddly, it’s what happens outside New York that will keep New York the financial capital.

Will the Credit Crisis of 2008 turn New York's dominance into submission?

And finally, the U.S. dollar still rules. Our accounting is legit, more so post-Enron, and years of regulation mean that corporate numbers are, for the most part, transparent. Investors know what they are buying. Not true with Gazprom or even Daimler. Remember all those companies that did their IPOs (initial public offerings) in Europe, on the AIM (Alternative Investment Market)? They all learned their lesson the hard way. They went public in name only. Few shares traded, prices were suspect, and you could never really sell any shares. A word of warning. Policy is the one thing that can screw up Wall Street. Tighter regulation is in the air. Some will be good, like higher reserve requirements for banks, and some will be awful, like restricting short selling or guaranteeing mortgages. New York will remain the world’s financial center—but beware that its biggest risk is just a three-and-a-half-hour Amtrak ride to the south.

Weekly Standard: What is Wall Street these days, anyway?

http://www.weeklystandard.com/Content/Public/Articles/000/000/015/654vucfz.asp

Before the last of Wall Street gets sold off as day-old fish on Fulton Street or washed into the East River altogether it’s worth asking, what is Wall Street these days anyway?

Thanks to Dick Grasso and CNBC, most of us think of Wall Street as balding men in ugly solid-colored suits yelling at each other and throwing litter on the floor of the New York Stock Exchange. Not even close. They might as well be holograms from Disneyland’s Haunted Mansion, just a hangover of years gone by. Or maybe Wall Street is stockbrokers, calling you at dinnertime, trying to put you into a few shares of some hot IPO. Or sleek bankers, guys (mostly) in gray Armani suits, blue shirts with white collars, and Hermès ties, jetting off to London to close some important deal. Not anymore.

Thanks to Dick Grasso, most of us think of Wall Street as balding men in ugly solid-colored suits yelling at each other and throwing litter on the floor of the New York Stock Exchange. Not even close.

So what is it? From 40,000 feet, Wall Street is about access to capital. The stock market trades every weekday, and sometimes slowly, sometimes violently, picks the economy’s winners and losers. Actually, it’s not the market, it’s you and me, our mutual funds and pension plans, the collective “we,” that do the picking via our buying and selling. It’s nice to be needed. You may not even realize it, but magically, the value of companies with great prospects goes up, meaning they can raise capital much more cheaply to hire smart programmers or build another solar panel factory. The flip side is that the price of companies doing all the wrong things (think General Motors and now Lehman Brothers) goes down, starving them of capital, a punishment for screwing up, until they disappear or do something to turn themselves around. The stock market, which is really you and me, does the dirty work of hiring and firing managers and green-lighting or killing projects. Pretty cool.

On the street level, of course, Wall Street is a lot nastier. After 20 years in the business, when I think of Wall Street, I think of alpha dogs generating revenue however they can: getting deals done, fighting for market share against all the other firms, and then at the end of the year, on the inside of their firms, unsheathing the political knives to carve up the ever growing bonus pool, and maybe also carve up each other. Wall Street is really just a compensation scheme. Firms generate sales, and employees get half the money. Yes, half. The rest, after expenses goes to  shareholders. Sweet deal.

Back in the days of private partnerships, White Weld or Brown Brothers or even Morgan Stanley, that was fine. They traded stocks and made good money. They offered advice on mergers and acquisitions and got paid handsomely. But in August 1983, the stock market and the U.S. economy took off. So did mutual funds. And Silicon Valley. And biotech. And a massive service economy. More capital was needed to fund the growth of great companies Think of all the technology companies that didn’t even exist in 1983. Wall Street partners had to pay for memberships in Greenwich country clubs, so partnerships couldn’t retain much earnings. They needed to tap those same public markets, and so went public to raise huge buckets of capital to help their clients. What a great 25-year run!

A very subtle change ruined the party. The same PC and Internet technology that was sweeping corporate America and getting rid of tellers and travel agents and secretaries and typesetters was also invading Wall Street. No one needed a broker anymore—you could do it all online. Traders at firms were being replaced by electronic trading systems that were faster, cheaper, and don’t show up late for work after taking clients out to Smith & Wollensky’s.

By 2002, Wall Street firms, despite being flush with huge balance sheets of capital to generate returns with,  were no longer making money in their bread and butter business of stock and bond trading, investment banking, and money management. The one group making money were these weird guys with math Ph.D.s creating exotic securities, derivatives, pieces of paper backed by pools of assets, maybe airplane leases, or home mortgages. The neat thing about derivatives is that no one but the person who created them knows what they’re worth, so you can sell them at huge markups. Woo-hoo. Mammoth departments were created all over Wall Street to securitize everything that moved. With the Fed forcing low interest rates in 2002-2004, the higher the yield the better.

Subprime home mortgages, because of higher risk (ooh, don’t say that word), had high yields and moved to the top of the list. When not enough of these loans could be bought from banks, firms like Bear Stearns and Lehman set up entire loan-origination subsidiaries, and in true Wall Street style were aggressive and rose to the top of the market-share tables. If you want to know why Wall Street CEOs made so much, it wasn’t from trading your 1,000 shares of Apple stock.

Still, those profits weren’t enough. Their customers were making great money buying Wall Street’s derivatives. But why should banks and pension funds and hedge funds have all the fun? What a perfect use for all that capital on their huge balance sheets and cheap financing from low interest rates. Wall Street, en masse, started buying all these high yielding derivatives for their own account. They ate their own dog food, if you will.

It was the easy trade. Borrow at 3 percent and make 6 percent or 8 percent or 10 percent. They liked it so much, they levered up. Meaning instead of just borrowing a dollar for every two dollars of assets they owned (which by the way, thanks to the 50-percent margin requirement, is the amount of leverage that you and I are allowed to buy stocks from these same firms), they borrowed 20 to 1, 30 to 1, and even 50 to 1, if they could get away with it. And man, it was a lucrative trade. So why not?

I’ll tell you why not. Because all of a sudden, Wall Street is no longer a business of traders or stock brokers or investment bankers, it’s a giant hedge fund. And they have no idea what they are doing. None. I ran a hedge fund for a lot of years and learned rather quickly that if a trade was too good, if everyone was doing the same trade, then I should absolutely turn around and run for the hills. But no one on Wall Street did. The spreadsheets fl ashed green. Risk was a four-letter word best not said in polite company. Wall Streeters became hedge fund cowboys and loved the spoils, until a tiny little downturn in housing sent everyone rushing to get out of the pool at the same time. Deleveraging a balance sheet leveraged at 30 to 1 is not easy or pretty when everyone is doing it along with you. And this is not the customer panic-selling and paying fees to Wall Street, it’s Wall Street doing the selling, pushing prices into the irrational range and turning companies belly up overnight.

Bear Stearns gone. WaMu too, into the belly of J.P. Morgan. Wachovia into Wells Fargo (or is it Citi?). Fannie and Freddie are the new U.S. Department of Mortgages and are closing their K Street offices. Lehman is dust in the wind. AIG in the penalty box. Merrill Lynch is a subsidiary of Bank of America, which barely survived their purchase of Countrywide Mortgages and, the word is, they won’t change their name to Lynch America Countrywide. They should.

And horror of horrors, Goldman Sachs and Morgan Stanley are now bank holding companies. Yeah sure, free toaster jokes are flying, but the net effect is they will now be restricted to 10: or 12:1 leverage, instead of 30.

There is plenty of finger pointing to go around. You can blame the Fed for low interest rates, rating agencies for putting AAA ratings on garbage loans, the SEC, short sellers, monoline debt insurers, lying borrowers, mark to market accounting—heck, let’s blame the Chinese for lending us our own dollars.

When running money, I bought plenty of stocks only to see the company screw up and the stock drop. I could try to blame the company, but my investors would blame me. And rightly so. It was nobody’s fault but mine. The buck stops at the management of these firms for chasing a bad trade and not sticking to their bread and butter businesses.

Is this the end of Wall Street? More like the start of a new one. At the end of the day, Wall Street is not about the names on the door, it’s about the people inside. There were great people at Lehman and Enron, Bear Stearns and AIG. Those who have a nose for making money will join other firms, or hedge funds, or start their own shop. Still, I’m pretty sure that half of those employed on Wall
Street in 2007 will be doing something else by January.

And the new Wall Street? There’s only one direction. It’s back to basics. Not quite back to the old white shoes blue blood partnerships of the past but certainly that business model. With a lot less capital, sit on the edge of the stock market and provide access to capital for the next set of great companies. Take ’em public, bank ’em, and grow with ’em. It may not be as exciting as the last few years, but it beats getting dumped in the East River. ♦

WSJ: Clean Up Print

http://online.wsj.com/article/SB122230704116773989.html

In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson's Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs.

What pikers. These are small-time deals. My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

 

Here's what's happened so far. New technology like electronic trading meant that Wall Street's bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves -- lots of them, often at 30-to-1 leverage. The financial products were made "safe" by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.

Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars

Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit.

There is a saying on Wall Street that goes, "The market can stay irrational longer than you can stay solvent." Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest. Traders call this a "Clean Up Print".

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.

So the U.S. will be stuck with a portfolio in the trillions of dollars in bad loans and last-to-be-paid derivatives. Where is the trade in that?

Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.

First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.

Europe is threatened by an angry Russian bear. The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with. Interest rates will tick up as the economy expands -- a plus for the dollar. Finally, a stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Perhaps Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly.

Forbes.com: Lehman = Pan Am

Not to sound harsh, but Lehman Brothers reminds me of Pan Am Airlines. No one (well, beyond their employees) is going to miss them. There are plenty of others to take their place.

In the '70s and '80s, a deregulated airline industry grew beyond its means, was stuck with bad assets, prices dropped and consolidation became inevitable. Pan Am was an early innovator, flying seaplanes into previously unreachable Caribbean Islands. They eventually flew everywhere, competed with everyone, stretched their balance sheet so it was as inedible as the mystery meat they served on flights and then one day went ... Poof!

The true money-makers on Wall Street all find jobs elsewhere. The worker bees in the middle tier see disruption, but are eventually absorbed. The bottom tier goes to work at Foot Locker

Analogies only go so far, but Wall Street got caught in the same wringer. Deregulated since 1975, balance sheets grew and grew as money got thrown at the profitable business of trading stocks and bonds, investment banking and money management. In the cheap-money period of 2002 to 2007, Wall Street’s thirst for capital saw no limits.

Inevitably, too many players and a bit of technology in the form of electronic trading squeezed the profitability of Wall Streets bread-and-butter businesses.

Forbes.com: Google's Offensive Strategy

Back in 1983 on the hit TV show The A-Team, George Peppard's Hannibal said to Mr. T's Bad Attitude Baracus, "There's an old saying: 'The best defense is a good offense.'"

Mr. T replied,"You got that wrong, man. A good offense is the best defense."

Then they wrestled pythons or something.

Make no mistake: This is not about browsers

On Tuesday, Google  let word slip--while showing off a comic book, of all things--about its new browser technology, code-named Chrome.

Was it offense against Microsoft's  Internet Explorer? Defense against Apple's  iPhone browser, Safari? A fight for the great network operating system in the sky? All of the above?

WSJ: The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

NYT: QOTD

Huh?