Over the last week two distinct stories about the bank “stress tests” have surfaced.  First, the Treasury was going to delay the release of stress test information until after earning season as to not cause any panic on Wall Street. The second, the Treasury allegedly told the banks that underwent the stress test to not release any information regarding the test results.

Travel back to 2002 with me, a time when the public was enraged with the scandals of Enron and WorldCom.  The public demanded accountability of financial information (well, politicians did – the public was more pissed that their retirement savings were wiped out) that was coming out of publicly traded companies.  

Enter the Sarbanes-Oxley Act (SOX).

Once instituted, SOX mandated a number of controls public companies had adhere to when reporting financial information.  One such control was “enhanced financial disclosures” which focused on internal controls that would assure that financial reports and disclosures were accurate.  The Act also called for timely reporting of material changes in corporate financial data.

You see the problem here?

If the financial stress test shows the financial data currently reported by the banks to be incorrect, and the bank management is aware the results of the stress test conflict with their own internal data, the banks are legally required to report the discrepancies.

The Treasury is, essentially, telling banks to ignore the law.

What happened to transparency in government and corporate financials?  How can one department of the government tell public companies to ignore federal law?  Better yet, why is no one calling attention to this?

The controls enacted in SOX were intended to provide transparency and accountability within publicly traded organizations, yet here the government is telling publicly traded companies to ignore transparency.

Something does not add up.

Another day is upon us, as is another Bailout bill. The Senate will vote this evening (7:30 Eastern) on a bill that is essentially the same except that it includes raising the FDIC insurance limit to $250,000 per account, up from $100,000, as well as the addition of a $8 billion tax cut for hit by natural disasters in the Midwest, Texas and Louisiana. Is this what the bill needs for Republicans to support the effort? If it passes the Senate, will the House pass the bill as well?

Wall Street seems to be asking the same questions as well as volatility is high in this trading session. The DOW is currently down 135 points, off session lows, trading at 10,713. As if the bailout wasn’t enough for traders to be worried about, more “mixed” financial data was released today, which may be adding to the down market.

Mixed, you ask? Yes – mixed. The manufacturing index fell to 43.5% in September, which is mighty close to indicating a recession, and mortgage applications plummeted 23% from the previous week. However, yesterday consumer confidence posted an unexpected rise and only 8,000 jobs were lost in the private sector for the month of September when Economists were forecasting a loss of 60,000.

While the stock market is quite volatile these days, and the credit markets are virtually frozen, I am starting to ask the question if the bailout is truly necessary. The world didn’t end when the first bill failed, business still went on, and there were not long soup lines… Yes, we will see the long term pain by not opening up the credit markets, mass bankruptcies and unemployment could be witnessed in the very near future but maybe that is what needs to happen…

I still view the whole situation as a correction, not a collapse and, as such, I am starting to waiver on the need for the bailout.

UPDATE: a few interesting tidbits

Want to see possible evidence the economy is slowing, the US has higher than expected crude supplies – translation: less oil is being used by consumers.

Investors are skeptical of the vote taking place this evening and they should be!

Jeffrey A. Miron, a senior lecturer in economics at Harvard University, says that Bankruptcy is the answer to the problem as the policies of the past have lead to our current situation. The creation of Freddie Mac and Fannie Mae, along with the push for subprime lending in the 90’s, lead us to where we are….

The government should let the firms go bankrupt instead of shifting the cost to the tax payer. Also, the talk about a crash is fear mongering.

Interesting…

While it mean nothing in terms of the bailout, it’s nice to see the DOW futures poining to a positive open - up 76 points as of this writing.

The question that continues to roll around my head is the one that no one seems to be addressing – where do we go from here?  

Go to the news website of your choice and do a little research.  See if you can find what the next steps are.  Will the bill be rewritten?  When does the house come back? What needs to change in order to pass the House?  If it passes the House how do we know the legislation will pass the Senate?  Where is the President?  Beyond him being “very disappointed” how is he working with the Congress move this forward.

Let’s forget the credit crisis and the impact the lack of liquidity will have for one second – what is killing the Market and economy now is uncertainty.  The longer direction is lacking, the longer the market is in the fog of uncertainty, major volatility can be expected which will only intensify the lack of credit available to the market.

Update

Bloomberg.com has the only “next step” I’ve been able to find.  The Senate will be back in on Thursday an may pass something and then send it back to the House.  

At this point even the politicians have no clue what is coming next and they admit it.

For the biggest one day drop ever:

 MCCAIN SUSPENDS CAMPAIGN TO FOCUS ON ECONOMY; WANTS DEBATE DELAY

MCCAIN: America this week faces an historic crisis in our financial system. We must pass legislation to address this crisis. If we do not, credit will dry up, with devastating consequences for our economy. People will no longer be able to buy homes and their life savings will be at stake. Businesses will not have enough money to pay their employees. If we do not act, ever corner of our country will be impacted. We cannot allow this to happen.

Last Friday, I laid out my proposal and I have since discussed my priorities and concerns with the bill the Administration has put forward. Senator Obama has expressed his priorities and concerns.This morning, I met with a group of economic advisers to talk about the proposal on the table and the steps that we should take going forward.I have also spoken with members of Congress to hear their perspective.

It has become clear that no consensus has developed to support the Administration’ proposal. I do not believe that the plan on the table will pass as it currently stands, and we are running out of time.

Tomorrow morning, I will suspend my campaign and return to Washington after speaking at the Clinton Global Initiative. I have spoken to Senator Obama and informed him of my decision and have asked him to join me.

I am calling on the President to convene a meeting with the leadership from both houses of Congress, including Senator Obama and myself. It is time for both parties to come together to solve this problem.

We must meet as Americans, not as Democrats or Republicans, and we must meet until this crisis is resolved.I am directing my campaign to work with the Obama campaign and the commission on presidential debates to delay Friday night’s debate until we have taken action to address this crisis.

I am confident that before the markets open on Monday we can achieve consensus on legislation that will stabilize our financial markets, protect taxpayers and homeowners, and earn the confidence of the American people. All we must do to achieve this is temporarily set politics aside, and I am committed to doing so.

Following September 11th, our national leaders came together at a time of crisis. We must show that kind of patriotism now. Americans across our country lament the fact that partisan divisions in Washington have prevented us from addressing our national challenges. Now is our chance to come together to prove that Washington is once again capable of leading this country.
–

Put the politics aside, come together as Americans and solve the problem. That is leadership.

In an effort to prevent the proverbial house of cards from falling in the financial industry, the Federal Reserve is providing an 85 Billion dollar loan to AIG in exchange for an 80% stake in the company.

Here is what will now take place:

1. AIG obtains a 2 year, 85 Billion dollar loan
2. Certain lines of business will be sold in order to repay the loan
3. The company’s management will be replaced, former Allstate Corp. CEO Edward Liddy will take the top spot within AIG

Most likely the entire company will be sold, in the long run, to repay the debts owed to the Federal Reserve; however, the two years allows the new management to orderly sell of the company, repay debts, and not cause panic in the financial markets. The major reason the Fed stepped in with AIG, and not in the case of Lehman, was due to the chance AIG would bring down financial institutions in the U.S., as well as overseas financial institutions.

What is unknown at this point is what happens to the company, and any equity holders. Does a much leaner AIG come out to the market place, or does this entire process simply mean here is 85 billion dollars to orderly disband the company leaving employees, equity and bond holders with nothing.

But what does this mean to us, the bag holding public? Nothing. The assets of AIG will have to be sold off in order to pay a loans coming due and thereby protecting the taxpayer.

So, no, this is not like Fannie Mae and Freddie Mac… that is the deal that will hurt the tax paying public.

Others:

Ankle Biting Pundits – The Financial Meltdown
Let’s talk Money – Fed’s $85M loan to AIG; Time to fire Paulson
Lehman collapse – AIG on the way
A Time to choose – $85 Billion to AIG, oh my god
Jon Taplin’s Blog – The AIG Rescue

Nothing like waiting to the last second – Lehman Brothers, at 1:21 AM ET, says that it was unable to find a buyer for the firm and that it intends to file for Chapter 11 bankruptcy.

With this news, which was expected, the sale of Merrill Lynch to Bank of America, and markets are falling around the world in response to the Lehman, as well as a crashing dollar, Monday will be a very interesting day on Wall Street.

Talk about a wild day on Wall St. – Lehman Bro. is on the verge of bankruptcy and Bank of America has agreed to buy Merrill Lynch at $29 / per share, which is a $12 premium over Friday’s close.

Why the buy-out of Merrill and not Lehman?  While Merrill is also facing a number of debt issues, much like Lehman, their assets are considered to be superior to Lehman.  Merrill Lynch has $1.6 trillion in asset management.  Also, this purchase will allow Bank of America the ability to take Merrill’s 49.8% stake in BlackRock which has more than $1 trillion in assets under management.

This means Monday will see the transformation of Wall Street – Lehman will, most likely, go under and Bank of America will purchase the 94 year old institution known as Merrill Lynch.

Not a bad purchase on B o A’s part for $44 Billion.