UBS appears to have been overcome by a wave of guilt...

Senior employees who have left the troubled Swiss banking group UBS in the last year have waived or repaid SFr70 million ($58 million) in salaries and bonuses.
Chairman Peter Kurer revealed details of the firm’s bonus uptake during an extraordinary general meeting on November 27, adding that UBS will conduct an independent investigation to decide whether any lawsuits should be filed against individuals over repayment or liability...

The same is not true at AIG, where executive bonuses were announced yesterday. But surely AIG said on Wednesday (with great fanfare) that it wasn't awarding any bonuses? (Fair enough, given that the company is being kept afloat by repeated injections of government cash).

Well, yes. But, you see, that only applied to bonuses. These are bonuses. Entirely different. (And, give them their due, they're being delayed by four months.)

Specifically, they're retention bonuses.

An AIG spokesman said on Wednesday that retention bonuses were different from the annual bonuses included in Tuesday’s statement.

Something the Federal Reserve did is apparently working!

The Federal Reserve's attempt to stabilize the housing market set off a chain reaction across the U.S. on Tuesday, dropping interest rates and quickly spurring a burst of refinancing activity by borrowers eager to lower their mortgage costs. Some brokers said it was the most activity they've seen in at least one year...

Potentially good news for UK mortgages too...

And before anyone gets too happy - look at this. (Via Ritholz; click through for the full-size chart)

The Citi bailout has helped the bank - CDS halved after it was announced.
Not so much the US government, which is now at record high risk levels.

And Felix Salmon points to credible fears that the Treasury repo market might be slightly broken...

Shares down 58% in the last week alone, is there any way for the US government to avoid buying it? The board's meeting today to look at a possible breakup. One alternative could be a takeover, but a) there aren't that many possible contenders and b) is it really a good idea to create an even bigger wobbly bank?
Yves Smith remembers a Japanese colleague: "Putting two sick dogs together will not create a healthy cat".

I'll be pleasantly surprised if both GMAC and Citi are still going by the end of the year...

"The Federal Reserve will do whatever it takes to ensure the US does not fall into a deflation trap, its vice-chairman said on Wednesday..." including cutting rates to 0.5% next month. JP Morgan expects the same in January - yes, bringing the target rate down to zero for the rest of 2009.

Mike Shedlock comments "ZIRP did not help Japan and it will not help US banks either. In fact, the rate cuts appear to be counterproductive. However, one cannot rule out the Fed cutting rates to 0% anyway. Bernanke is in academic wonderland and appears to be hell bent on sticking with his models regardless of how poorly those models perform in actual practice."

Mark Thoma thinks this is a sign that the Fed is now drifting.

Paul Krugman, too, is not optimistic and also draws the Japan comparison.

Michael Lewis, author of Liars' Poker, wrote this long piece on the subprime business - describing with gusto the mistakes involved and tracing the rot back to the decision by John Gutfreund to take Salomon Brothers public back in the 1980s.

He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers...

This is far from the first time I've heard the suggestion that partnerships - or other forms of employee ownership - might be the way forward for the financial sector. The UK's mutual building societies spent decades being humdrum, unexciting, unambitious - and solvent. Then they all demutualised, as more than one recent conference attendee from a major bank pointed out to me, and what happened to them? To Abbey National, Bradford & Bingley, Halifax, Midland, C&G, Alliance & Leicester, Woolwich, and, of course, Northern Rock? Bought up or shut down, almost to a man.

And the Co-operative Bank is still the ninth largest in the country - and seeing rising profits and minimal writedowns, not to mention rejecting bailouts.

I'm not trying to write off the public limited company altogether. But which lines of business are still dominated by employee-owned companies or partnerships? Lawyers, doctors, dentists, undertakers - all areas with little physical capital, but where human capital, trust and reputation are key.

Where you need physical capital - in manufacturing, for instance - tapping the equity market is indispensable. But isn't it now becoming increasingly obvious that easy access to vast amounts of (apparently) freely flowing capital -through the equity or the wholesale markets - has in fact been a huge temptation, rather than a boon, for banks?

I was joking when I described the original TARP (now of course completely changed) as "Mr Paulson seizing the means of production". But I'm now coming round to the view that a bit more of "the common ownership of the means of production, distribution and exchange" might not be such a bad thing for the financial sector.

Barry Ritholz reprints this extraordinary map - how many homes are underwater (worth less than the outstanding mortgage debt) in the San Francisco area. California was at the heart of the bubble (do bubbles have hearts) - especially the more rural counties of the Bay Area.

Andrew Cuomo, scourge of bankers, seems to be preparing to prosecute anyone at a government supported bank with a bonus of more than $250k for "fraudulent conveyance".

There are new waves of bad news about to break for hedge funds (down $100 billion in the last month) and CDOs.

And, apparently, doubt over whether the FDIC loan guarantee is really a guarantee at all.

Apart from that everything's fine.

...for AIG, which is reportedly close to a second bailout loan - this one smaller ($60 billion rather than $85 billion for the one it replaces) but with a longer maturity, and, crucially, without the punitive Libor plus 850bp interest rate. Felix Salmon has spotted something in the description:

Securities lending is meant to be a no-risk operation. In a repo operation, the long-term owner of a stock -- in this case, AIG -- will sell it to someone who wants to short it, and charge them interest. They then subsequently buy back the stock at the price they sold it for; the interest is pure profit.

AIG, however, seems to have gotten spectacularly greedy. It took the proceeds from the stock sales, and instead of putting it somewhere safe, invested it in RMBS. Which are now worth 50 cents on the dollar.

Meanwhile, the Washington Post has spotted something that went almost unnoticed at the time - a $140 billion tax exemption for merging banks. There used to be a limit on writing off previous years' losses against this year's profits for tax purposes - specifically, there was a limit to the extent you could do it with the losses made by a company that you have since acquired. (Otherwise you could buy loss-making companies really cheaply, simply in order to write off your profits against their losses, and come out well ahead of the game).

Well, not any more.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin...
Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention....
The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.
The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

To give them their due, I would guess that this was a sincere attempt to help the banking industry rather than a cynical exploitation of "a good day to get out anything we want to bury" in order to push through a profitable but unpopular change. And it's unlikely that the decision will be reversed now - the WP quotes one lawyer comparing being "anti-bailout" now to being "anti-war" on September 12 2001.

The deeper question is: should we really be encouraging bank consolidation? We've already got a fair number of banks that are too big to fail. How much bigger do you want them to get?

The efforts to bring in central counterparty clearing for CDS (deadline - end of this month) aren't a bad thing, but it's hard not to see them as a solution without a problem. The last few weeks have seen CDS tested in the US (Fannie and Freddie, Lehman, WaMu) and in Europe (Landsbanki, Glitnir, Kaupthing) without any dire consequences - although there are suggestions that the auctions showed CDS to be a less than perfect hedge.

Last week we looked at the problems that the lack of credit was causing in the shipping industry - today the FT reports that they are getting worse:

Since short-term dry bulk charter rates fell 71.9 per cent in October, traders and shipowners have worried that traders might be caught out by the speed and severity of the fall...London-based, New York-listed Britannia Bulk, which has been hit by its exposure to speculative FFA trading, put its British operating subsidiary into administration on Friday. It is the first quoted shipping company to suffer such a blow during the current downturn.

Duncan Dunn, senior director in the futures division of London’s Simpson, Spence & Young shipbrokers, said the market’s rapid fall would have left anyone betting on upward movements needing to make substantial payments...The market uncertainty stems partly from the complex chains of transactions in the market and the lack of clarity about different companies’ FFA trading.

It is widely expected that hedge funds could be particularly badly hit.

Lack of transparency, poor risk management, unexpected volatility, huge exposures - all sounds very familiar.

The WSJ today reports that

as many as 1,800 publicly held institutions could apply for government investments in coming weeks, out of concern that failing to do so could make them losers in a banking sector reshaped by the Treasury's $700 billion rescue plan

Ironically, a few weeks ago there were worries that seeking government aid would be stigmatised, because it would make people think "if that bank's asking for aid it must be on its uppers." Now, though -

due in large part to efforts by Treasury, banking lobbyists and legal advisers to sell the TARP... institutions across the U.S. worry that if they don't try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.

In other words, if the food's all free, and you see someone sitting down without a plate in front of them, you start wondering if perhaps they're too sick to walk over to the buffet.