In the last year, Washington has been shoveling our tax dollars out the door to bail out the money mistakes of multi-billionaires.

It cut interest rates from 5.25% to 2% ,which sent inflation soaring, yet mortgage rates remain higher than they were a year ago. It spent $29 billion to finance the merger of Bear Stearns and JPMorgan Chase & Co. (NYSE: JPM). And now it's about to spend as much as $800 billion to bailout a few huge investors who own mortgage-backed securities (MBS) issued by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

I find the reasons why this latest bailout shouldn't happen to be far more compelling than the reasons it should. (Here's some background on the mortgage giants.)

Here are five reasons I think this bailout shouldn't happen:

• Punishes the innocent and rewards the guilty. Why does it make sense for taxpayers -- most of whom are paying their mortgages on time and working hard to support their families despite declining real wages and higher costs -- be asked to dig into their pockets to clean up the errors of a few large institutional investors? Why not let the people who made the bad decisions pay for their own mistakes?

• Violates free market principles. In the world of venture capital, you place your bets and you either make or lose money based on a combination of luck, good strategy, and effective execution. If I make money I don't have to give my profits to taxpayers. And if I lose my investment, I don't expect them to bail me out. Why should investors in Fannie and Freddie bonds get taxpayers to bail them out of their bad decisions?
• Will not revive housing market. If Washington really wanted to revive the housing market, it would buy and destroy all the excess housing inventory on the market. By reducing supply so it more closely matched demand, prices would bottom out. And eventually, when the economy revived, prices would start to rise as people bought homes. Today's slightly higher mortgage rates are not the reason that housing prices are plunging. And the slight drop in those rates that might result from the bailout do not justify its cost.
• Lacks sufficient data to win its case. The evidence that supports the need for such an enormous taxpayer-funded bailout is simply too vague to convince me that it's essential. If policymakers could present objective data showing that without this bailout the global economy would collapse, I might change my mind. Or at the very least, Paulson should provide an analysis that shows how much each MBS is really worth based on a realistic forecast of future mortgage payments. Why not let everyone see the data that seems to be driving the rush to bailout Fannie and Freddie? What I've seen so far suggests that the bailout is happening because a few huge bond investors might lose money without it.
• Further weakens America's balance sheet. By adding $800 billion to our $9.67 trillion in national debt, this bailout could raise America's national debt to $10.5 trillion -- 75% of GDP. This makes our country a much weaker bet for lenders since any country whose debt is greater than 60% of GDP is seen as a risky borrower. This added risk could weaken the dollar and raise the long-term cost of capital.

What is prompting Paulson to use our tax dollars for the latest bailout?

There are two likely reasons:

• Overly optimistic accounting. A so-called independent investigation from Morgan Stanley (NYSE: MS) has found that Fannie and Freddie overstated their capital and understated their losses, according to Bloomberg. I find it interesting that Morgan Stanley, which could get significant income from restructuring Fannie and Freddie, was asked to provide the basis for throwing it into conservatorship. Why not hire an accounting firm that would not benefit from such business to offer a truly independent opinion?
• High cost to refinance monthly debt. Bloomberg writes that as of "mid-August the companies had $223 billion of debt to refinance by the end of the quarter." It also reports that Paulson is concerned because investors are requiring them to pay more to convince investors to buy their paper -- "at 3.229 percent or 97.5 basis points more than Treasuries of similar maturity, the highest since at least 1998," according to Bloomberg. So the "free" market is demanding that a riskier borrower pay a higher rate to compensate for that risk means that America's taxpayers need to bailout Fannie and Freddie? By that logic, if I make a late payment on my mortgage and thus need to pay a higher rate, I should get taxpayer money to bail me out.

I think there are two more unstated reasons for the bailout:

• Wipe out Democratic powerhouse on the way out. Fannie and Freddie formerly provided significant capital and talent to the Democratic party. Through a government takeover, the White House will significantly diminish this power base. Just as it used the 9/11 attacks to justify a war in Iraq and the legalization of spying on Americans, so it is using the current situation to force through its radical plan in its final weeks in power.
• Bailout big MBS holders. As I posted, Bill Gross, whose PIMCO holds roughly $500 billion in MBS, and China's state bank, which owns another $340 billion, will benefit most from this use of our tax dollars. It seems to me that these investors can hire the talent to assess risk and reward in their portfolio. If they make a bad bet, they should prune their losses and move on. If their losses are too big to do that, let them file for bankruptcy.

This bailout is being bulldozed into existence. The U.S. government is supposed to be "of the people, by the people, and for the people." But that's not what's happening here. This is government of the elite for the elite against the people.

Update. AP reports that Paulson's plan is in effect. Herb Allison, formerly of Merrill Lynch (NYSE: MER) will run Fannie and David Moffett, a former vice chairman of US Bancorp (NYSE: USB), was picked to head Freddie. And common and preferred shareholders get a chance to talk about "capital-restoration plans."

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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The New York Times reports that since we've had such a catastrophic run with home mortgages, it's time to watch the collapse of commercial ones. The same names surface when it comes to the collapse of our financial system -- in the case of commercial mortgages Deutsche Bank (NYSE: DB) ($25.1 billion), Morgan Stanley (NYSE: MS) ($22.1 billion), Lehman Brothers (NYSE: LEH) ($40 billion in commercial mortgages and property), and Citigroup, Inc. (NYSE: C) ($19.1 billion) are among the biggest holders. They are also big names in Auction Rate Securities (ARS).

Why do people think that commercial real estate could be tanking? Here are four reasons:

• Declining property prices. The Times reports that the Moody's/REAL Commercial Property Price Index has dropped 12% since its peak last October.
• Commercial mortgage write-downs. According to the Times, Morgan Stanley reported commercial mortgage write-downs of $400 million and Wachovia (NYSE: WB) said it would take at least $1 billion worth of such write-downs.
• Potential Riverton default. The Times reports that Riverton, a 1,230 unit Harlem development, was premised on the idea that developers could convert "lower-priced rentals to apartments priced closer to the higher market average." But the Times reports that Monday Fitch "issued a negative watch on part of the Riverton Apartments trust" since the developers had not made much progress -- threatening commercial mortgages that Citi and Deutsche Bank hold.

• Increased losses in commercial mortgage trusts (CMT). The Times reports that losses are rising in CMTs -- such as the one that Citi and Deutsche Bank created for Riverton. Delinquencies rose at the end of July to 0.43% from 0.41% at the start of July. And since February, delinquencies on commercial mortgage-backed securities have increased 43% according to Fitch.

What is going on here? In times of trouble, the distinctions between different kinds of loans tend to fade away. Banks and borrowers over-extended themselves on the premise that prices would keep rising and bail out imprudent lending decisions. This means that the firewall that policymakers think separated one kind of credit default from another went up in smoke. (Remember how Hank Paulson and Ben Bernanke said that subprime was contained? Not so much).

Whether our financial system can survive depends on the ability of banks to raise more capital than the amount of bad loans they need to write off against their existing capital base. And that is looking like a pretty shaky financial foundation.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

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Bank of America cut the earnings outlooks of Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), according to Briefing.com. The news service also reports that UBS downgraded Burger King (NYSE: BKS) to Neutral from Buy.

Amedisys (NASDAQ: AMED) was started as Outperform at Baird, according to 24/7 Wall St. The financial website also reported that Telus (NYSE: TU) was raised to Buy at UBS.

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Citigroup increased its estimates for losses at Morgan Stanley (NYSE: MS), Lehman (NYSE: LEH), and Goldman Sachs (NYSE: GS), according to MarketWatch.

Piper Jaffray downgraded Salesforce.com (NYSE: CRM) to Neutral from Buy, according to Briefing.com. The news service also reported that Bank of America intiated Amerigroup (NYSE: AGP ) at Neutral.

Synopsys (NASDAQ:SNPS) was cut to Sell at Citigroup, according to 24/7 Wall St.

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In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.

Among the settling firms were Citigroup (NYSE: C), UBS (NYSE: UBS), JP Morgan Chase & Co. (NYSE: JPM), and Morgan Stanley (NYSE: MS).

Their conduct was so bad that former Attorney General Spitzer agonized over whether to indict them for criminal conduct.

The industry unleashed a massive PR campaign. It convinced you that it saw the error of its ways. They had "reformed." You could trust them again with your hard earned assets.

And you did. Money flowed back in the coffers of these firms and others.

That was the first time.

Recently, settlements were announced in the auction-rate securities debacle with each of these firms and with Wachovia (NYSE: WB). It is likely that more cases will be brought.

The charges were that these firms misrepresented the safety and liquidity of these securities. When they realized that the market was collapsing, some brokerage firm executives sold their personal positions, but deceived retail investors into believing that the markets were just fine. They did this to satisfy their underwriting clients and to keep the underwriting fees flowing.

You believed them again and bought billions of dollars of these securities, thinking that they were "as liquid as cash." Sound familiar?

That was the second time.

Even if the culture of greed that pervades Wall Street, and caused them to sell you out twice, did not exist, you would still be better off not using them.

The securities industry has successfully kept a lid on an exhaustive study that demonstrated that investors who buy stock and bond mutual funds directly from fund families, without using any broker or advisor, significantly outperformed those who used these "investment professionals."

Finally, did I mention that at least one study (that I co-authored) casts serious doubt on the fairness of the mandatory arbitration system imposed on investors by the securities industry? This means that, if you are victimized by your broker, you are unlikely to get justice from the arbitration panel appointed by the industry you are suing.

As our president so eloquently stated:

There's an old saying in Tennessee -- I know it's in Texas, probably in Tennessee -- that says, fool me once, shame on -- shame on you. Fool me -- you can't get fooled again.

I can only speculate what he would have to say about being fooled three times!

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and the NY Times bestseller, The Smartest 401(k) Book You'll Ever Read (Perigee Books 2008). Visit his website at Smartestinvestmentbook.com.

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Bloomberg News reports that two more big banks -- JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) have made offers of $7 billion to 30,000 holders of Auction Rate Securities (ARS) -- those long-term securities whose yields reset in weekly auctions until the auctions failed this February. JPMorgan and Morgan Stanley also agreed to $60 million worth of fines. This brings to five the number of large firms that have settled so far. The Wall Street Journal reports that of the big firms that have yet to settle, Goldman Sachs (NYSE: GS) is proving to be among the most unhelpful to its clients.

Meanwhile, the Wall Street Journal's James Stewart, who first got me writing about the ARS catastrophe, has finally broken his silence. And he seems to think that the ARS mess is much worse than he originally thought back in February. Stewart was shocked that brokers were unloading this toxic waste on customers so they could get it off of their books and out of the accounts of their executives. Stewart's reaction struck me as surprisingly naive -- particularly considering his long track record of reporting on Wall Street misdeeds.

Nevertheless, the problems with the frozen ARS continue to stress out investors who fell victim to Wall Street's chicanery. Among the top 10 municipal ARS issuers, the following have yet to offer any restitution to ARS holders (the value of their 2007 ARS issuance is in parentheses):

• Goldman Sachs ($4.3 B)
• Bank of America (NYSE: BAC) ($3.7 B)
• RBC Capital Markets ($1.2 B)
• Lehman Brothers (NYSE: LEH) ($1.1 B)
• Wachovia (NYSE: WB) ($0.6 B)

There are many other small and medium sized firms that are still holding up their investors. But I am somewhat surprised that Goldman is keeping its high net worth clients in ARS limbo. The Journal quotes Carl Everett, an adviser to Accel Partners and a former high tech executive, whose ARS froze in February (pun intended).

But last Friday, Goldman told Everett that "it will not buy back his" ARS. The Journal quotes Everett as saying, "That's disappointing to me -- my expectation is for the Goldman Sachs brand. My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents."

As Stewart pointed out, while the short-term costs to do the right thing for ARS investors will be high, the long-term cost will be the loss of trust. I have posted many times about this and wonder why anyone would pay a broker to put the firm's interests ahead of those of its clients.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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CNNMoney reports that Morgan Stanley (NYSE: MS) is the latest bank to buy back its worthless Auction Rate Securities (ARS) from individual investors. With that buyback, Morgan Stanley follows in the wake of Citigroup, Inc. (NYSE: C), Merrill Lynch & Co., Inc. (NYSE: MER) and UBS AG (NYSE: UBS).

CNNMoney notes that Morgan Stanley said it would offer to repurchase all ARS "held by individuals, charities and small and medium-sized business with accounts of $10 million or less at the bank." Morgan Stanley will begin to start buying back $4.5 billion worth of ARS on September 30th and will "make its best effort to provide liquidity solutions" for institutional investors by the end of 2009. But New York attorney general Andrew Cuomo is not satisfied with Morgan Stanley's proposal.

Meanwhile, the list of big ARS issuers that have not settled grows shorter. Here are six holdouts (with their 2007 municipal ARS issuance in parentheses):

• JPMorgan Chase (NYSE: JPM) ($5.2 B)
• Goldman Sachs (NYSE: GS) ($4.3 B)
• Bank of America (NYSE: BAC) ($3.7 B)

• RBC Capital Markets ($1.2 B)
• Lehman Brothers (NYSE: LEH) ($1.1 B)
• Wachovia (NYSE: WB) ($0.6 B)

There are many small and medium sized brokerages that are not on this list. Cuomo is starting off with the bigger fish and hopes to use their settlements to push the entire industry to make its customers whole.

It's a wonder that some people think Wall Street needs less regulation.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

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After nearly six months of stalemate, things are finally starting to happen for holders of Auction Rate Securities (ARS) -- the $330 billion of long-term debt whose yield used to reset in weekly auctions. This morning, The Boston Globe reports that UBS AG (NYSE: UBS) is poised to announce that it will redeem $19.4 billion worth of ARS and pay $150 million in fines, split between Massachusetts and New York. UBS follows Citigroup, Inc. (NYSE: C) and Merrill Lynch & Co., Inc. (NYSE: MER), which yesterday announced plans to redeem over $17 billion worth of ARS.

Why should you care? If you have money frozen in these securities, the reason is obvious. If not, what's happening here suggests three lessons for investors:

• Don't buy without knowing. Before you buy anything a broker is trying to sell you, read the prospectus, find out how the broker will be compensated for the sale, and if you don't understand what you're buying, don't buy it. Many people bought based on broker pitches that ARSs were cash equivalents, highly liquid, and yielded slightly more than money market funds. It turns out that ARS auctions started failing publicly last September.
• If your money becomes illiquid, make alot of noise. ARS investors contacted government officials and the media in an organized way. The public attention led to investigations by legal officials. That attention uncovered UBS e-mails demonstrating that brokerage firms decided to dump the toxic waste from their own books to the accounts of their individual customers -- even as their executives dumped the securities from their own portfolios.

• Don't give up. The announcements this week sound good. But until all the ARS holders get their money back with interest and penalties, they are just announcements. Unfortunately, in many cases it will not become clear until some time next year whether these announcements are just a public relations ploy. ARS victims will need to keep at it until they get all their money back.

Yesterday I posted a top 10 list. Here are the seven companies -- the volume of their 2007 municipal ARS issuance is in parentheses -- that have yet to announce their settlement deals:

• Morgan Stanley (NYSE: MS) ($5.2 B)
• JPMorgan Chase (NYSE: JPM) ($5.2 B)
• Goldman Sachs (NYSE: GS) ($4.3 B)
• Bank of America (NYSE: BAC) ($3.7 B)
• RBC Capital Markets ($1.2 B)
• Lehman Brothers (NYSE: LEH) ($1.1 B)
• Wachovia (NYSE: WB) ($0.6 B)

Will this public attention on Citi, Merrill, and UBS force them to make amends as well?

Update. This afternoon, CNNMoney reports that UBS will buy back only $18.6 billion worth of ARS -- $800 million less than the Boston Globe reported this morning. And UBS will extend the pain for those waiting for redemption. According to CNNMoney, "Under the agreement, the Swiss bank will buy back $8.3 billion from individual investors and charities during a two-year time period beginning Jan. 1, 2009. The company also will purchase, beginning in June 2010, all or any of the remaining $10.3 billion held by institutional clients." The Globe got the $150 million fine part right.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

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Morgan Stanley (NYSE:MS) has decided it does not want to take the risk of laying out more money on many of the home equity loans it has given to customers. Many of the houses backing these funds are now worth less than their mortgages. According to Bloomberg, Morgan "told thousands of clients this week that they won't be allowed to withdraw money on their home-equity credit lines."

Since most other banks and brokerages with similar loans out to their customers have the same problems Morgan does, it appears that the market is at the beginning of a period where, for many people. getting money from these facilities will come to an end.

Since consumers are already faced with high commodities and oil prices, costly credit, and falling home and stock values, the home-equity loan was one of the last places people could turn for capital.

The news is almost certainly bad for retailers and auto companies. Consumer access to capital seems to be shrinking by the day. Cutting off home-equity withdrawals may take balance sheet risk away for Morgan and its peers, but their customers will get squeezed even harder than the economy is squeezing them now.

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

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Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

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Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

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M&A activity is heading for the dust bin. The should put additional pressure on the earnings of big Wall St. banks and brokerages. According to the FT," KPMG's Global M&A Predictor - an index that looks at 1,000 companies and the ratio of their share price to earnings - is forecasting a decrease in both appetite and capacity of companies to make deals."

The major reason for a potential shift in M&A sentiment is the failing P&L prospects of many companies as the economy falls under more and more pressure. Who wants to buy a company which is likely to do poorly?

Short-term, the real burden of the fall-off in deals will be investment banking operations. With the financial fortunes of many firms like Lehman (NYSE:LEH) and Morgan Stanley (NYSE:MS) already in enough trouble to cause worries about whether they can stay independent, losing most of their fees for merger advisory service comes at an especially hard time.

When it rains, it pours.

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

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Morgan Stanley raised its overweight position on global emerging market equities to 6% from 2%, according to MarketWatch.

HSBC upgraded Morgan Stanly (NYSE:MS) to "overweight" from "equal weight", according to Briefing.com. The news service also reports that Caris initiated First Solar (NASDAQ:FSLR) as a "buy."

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

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The Wall Street Journal reports that the $330 billion auction rate securities (ARS) scandal, which since February has frozen the funds of investors who thought they were getting a low risk place to park their cash, has finally generated its first criminal probe. The charge is that two Credit Suisse brokers lied "to investors about how they placed their money into short-term securities."

I have been following the ARS scandal since February when I first became aware of the situation. Since then, my post has generated 5,036 comments from people whose money has been frozen thanks to the collapse of the weekly auctions that were intended to set the yields on these municipal bonds. These commenters are trying to team up to figure out how best to get back their money.

The Journal reports that the Justice Department's U.S. attorney's office for New York's Eastern District, represents the first known criminal matter stemming from the crumbling ARS market. Up until then, the lawsuits were of a civil nature -- seeking class-action status and more than 80 individual arbitration claims. But a criminal probe based on lying could result in cash damages and jail terms for these brokers.

The Journal reports that the two brokers, Eric Butler and Julian Tzolov, resigned from Credit Suisse on September 7, 2007, after being accused by clients that the brokers told them the ARS were backed by student loans rather than complex collateralized debt obligations (CDOs). Butler and Tzolov joined Morgan Stanley (NYSE: MS) after Credit Suisse fired them.

Morgan Stanley fired these two hot potatoes on Monday. No word on whether Morgan Stanley knew why they were fired from Credit Suisse. Either Morgan Stanley knew and didn't care or they didn't know. In any case, their hiring makes it look like Wall Street doesn't consider lying to clients about their investments to be a big problem. It just becomes a problem when it leads to bad publicity and potential legal fees.

I welcome comments from those who can explain why they keep their money with a commissioned broker.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Late last year, when the IPO market was much stronger, Morgan Stanley (NYSE: MS) sold a piece of its MSCI Inc. (NYSE: MXB) division to the public. Investors were certainly eager for the deal as the price range increased from $14-$16 to $16-$18. The stock price ultimately reached as high as $38.40.

But today, things got a little rougher. Morgan Stanley said its going to unload half its position in MSCI.

No doubt, with the credit crunch, there has been a flurry of asset sales. And MSCI is a solid asset, which includes a broad portfolio of financial data products like indices (more than 100,000) and major brands such as Barra.

What's more, MSCI reported its Q2 results today. Operating revenues spiked 21.9% to $108.2 million and adjusted EBITDA was up 43.4% to $48 million (yes, this is a high-margin business).

The volatility in global markets has been boosting MSCI. Basically, financial institutions need to find better ways to deal with risk management.

Yet Morgan Stanley's share sell-off will add some pressure. So far in today's trading, MSCI's stock is down 5.5% to $32.00.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

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