By Mathew Katz

Congratulations, folks. You just made a 20 percent annualized return on your investment into Morgan Stanley.

The bank today agreed to pay $950 million to buy back warrants from the Treasury after it bought $10 billion in stock to help rescue Morgan Stanley in October. Morgan Stanley has now repaid that loan, with the price of the warrants on top of that. Overall, the government made a $1.27 billion dollar profit, between warrants and dividends.

Of course, as with other warrant buybacks, the deal largely frees the bank from government-enforced restrictions on things like bonus payouts. Still, unlike Goldman Sachs, which also bought back its warrants last month, Morgan Stanley reported a larger-than-expected second-quarter loss. That's not exactly a bonus-worthy performance, but banks have been eager to throw off government restrictions ever since the TARP program began in October.

On Friday, the Department of Justice announced the arrest of Paul Gabriel Amos on charges that he masterminded the theft of $27,167,078 from the Citibank account of the Ethiopian central bank. Officials accuse Amos and his alleged co-conspirators of posing as senior officials from the Ethiopian central bank and ordering that money be wired to their bank accounts.

The DoJ says that Citibank, the second foreign bank to open a branch in Ethiopa, got fooled by faxed documents and cell phone numbers that turned out to be from Nigeria. Allegations say the scheme, which began in September, fell apart when several of the co-conspirators' banks were unable to process the payments and returned them to Citibank.

A Citigroup spokesperson told the Times: "We have worked closely with law enforcement throughout the investigation and are pleased it has resulted in this arrest. Citi constantly reviews and upgrades its physical, electronic and procedural safeguards to detect, prevent and mitigate theft."

Late yesterday, our Planet Money colleague, Alan Cordova, went to hear J.P. Morgan honcho Jamie Dimon speak at Columbia Business School - Alan's alma mater.

Alan reports that Dimon was more direct about the ins and outs of the credit crisis than he expected from such a high-profile Wall Street CEO.

Here are some of Alan's takes from the hour-long talk:

-- On who's to blame for the current crisis: For one, Dimon said banks have been roundly blamed for the credit crisis, but the ordinary consumer is partially at fault. He noted there was a 30% rate of fraud on subprime mortgage applications in the past few years, and individuals made investment decisions that were bad under any market conditions. More specifically, blame does not lie exclusively with the American banks -- European banks were twice as levered, and they were under no compulsion to buy the subprime products.

Continue reading "The House Of Morgan, and Dimon" >

James King sends this, from Portfolio: "The End of Wall Street's Boom." It's a fascinating article, written by Michael Lewis of Liar's Poker fame, about a few of the guys who actually saw this financial disaster coming and bet on everything falling apart, Steve Eisman and his colleagues at the hedge fund FrontPoint. Head trader Danny Moses describes the feeling of realizing they were right:

As we sat there, we were weirdly calm," Moses says. "We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed." Eisman was appalled. "Look," he said. "I'm short. I don't want the country to go into a depression. I just want it to ******* deleverage." He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it.

Here's a fun interactive chart of just how badly the Dow Jones Industrial Average has done this year. Incredibly, it doesn't include the additional 6% slide the index shaved off today.

You can change the chart to look at just the last few days or the last five years on the bottom there in blue.

One of the strangest sights this morning: a huge Wachovia Securities ad on page 5 of the Wall Street Journal under the headline "The key to navigating today's economy is to think long-term. After 120 years, it's second nature to us."

What's wrong with that you say? Only a little story on the paper's front page detailing how Citigroup spent $2 billion to acquire most of Wachovia yesterday.

An energy trader in Houston made $1.25 million in profit trading on Goldman Sach's' volatility last week. This week, he's venting against President Bush's economic bailout plan and says he plans to spend the profits on advertisements opposing it.

Lawmakers no doubt took some political cover today by giving Paulson and Bernanke a drubbing for the cameras. But that doesn't mean all of that indignation was necessarily faked.

Several senators cursed PaulNanke for not reacting sooner to the mortgage mess. Our friends at seekingalpha.com appear to agree.

Why Didn't Bernanke, Paulson Plan Better?

Thoughts?

When Congress finally sorts out what the financial bailout looks like, the government will still have to deal with its Goldilocks problem. It has to make sure it doesn't pay too much or too little for Wall Street's bad loans.

Ideally, the Fed wants to buy assets cheaply enough to make sure taxpayers get a good deal and even make money when markets stabilize. But it has to pay a high enough price to avoid causing banks unneeded pain.

Peter Cramton, an economics professor at University of Maryland, says the best way to do that is to hold what's known as a "reverse auction."

Through the process, the government would announce a target for how much of a particular security it is seeking to buy in dollar terms, and an initial buying price.

Continue reading "Going Once. Going Twice." >

We are working hard to bring stories from the inside of these massive, troubled financial institutions.

We have contacts, but can always use more.

The conversations can be entirely off-the-record. That means we never tell anyone who we talked to or where they work.

We would love to hear from employees of hedge funds, investment banks, other banks, rating agencies, government regulators, et cetera.

We're not necessarily looking for controversial whistleblower stuff (though, we would be happy for that, too). We really just want help understanding how this crisis looks from the inside.

A brief, discrete conversation from someone who really knows helps inform our reporting tremendously.

If you ever screamed at the radio, or the newspaper, or a website and said: "those idiots. They don't know what it's really like." Well, this is your chance to clear things up.

Please send emails to planetmoney@npr.org.

That is a private email that only our team gets to access.

It looks like the independent investment bank is a thing of history. Or a thing of Goldman Sachs, since they'll probably be the only one left shortly.

It's a fascinating story, which I'm working on for tomorrow's All Things Considered.

My current hypothesis (which I'm checking out assiduously) is that investment banks were always like a casino.

They were the House. They set the table for other players to place bets. They served as match-makers between companies with money and companies that wanted to borrow money. They came up with all sorts of complicated ways of getting money from one group to another.

But at the end of the day, the investment bank could only profit.

That's because they didn't put their own money at risk. They let other people take the risk. The investment bank just took a cut of every transaction.

No matter what happened--stocks go up, stocks go down; bonds default, whatever--the investment bank was able to end each day by grabbing a few chips off the table and waving goodbye to the winners and losers.

Then, for complicated reasons, starting around 10 years ago, the investment banks decided to sit down at the table and put their own money at risk. They became the suckers. Which, any casino manager will tell you, is the last thing you want to do.

Why did this happen?

That's what I'm putting together now. I have some theories. Some tips. I'm looking to flesh this out.

If you happen to know, if you worked at an investment bank or are a historian of investment banks, please, please, please: send an email to planetmoney@npr.org.

Continue reading "When Investment Bankers Became Their Own Suckers" >

By Bloomberg's estimate, global stocks have lost about $2.8 trillion this week. This trader delivered as clear and succinct an analysis as I've yet read:

"It's ugly," said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. "It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now."

This might be kind of obvious, but after spending the morning reading about the emergency AIG rescue plan and the future of Lehman Brothers, I got nervous that something is missing.

People at all these companies made really stupid decisions. They ignored clear warnings. They went for big risks because they wanted big returns. They forgot common sense.

At the end of the day, this whole crisis was caused by banks giving mortgages to people who had no hope of paying back those mortgages. Then, Wall Street investment banks -- the very ones in trouble now -- acted like those lousy mortgages were the same as good mortgages. They transformed them into complex financial instruments and sold them to other banks around the world.

I think Alex and I did a pretty good job of explaining this in our This American Life story.

If you'd rather read a book, I really like Charles Morris's, Trillion Dollar Meltdown. (Here's a short, free version. I did a story for All Things Considered about him).

But whatever you read, don't forget: they screwed up. Big time. They wanted to grow faster than was healthy. They used lousy risk models.

These companies SHOULD feel the full weight of their decisions. It just so happens that their risky behavior has put the entire world economy at risk. The government feels it has no choice but to help out.

But everyone knows: these banks and insurance companies don't deserve the help.

The New York Times has a helpful guide for customers of the most troubled banks.

The short hand is this: whatever you have at a bank--cash, investments, mutual funds--that is, most likely, yours. If your cash holdings are less than $100,000 and it's an FDIC bank, you are really fine.

If you have a 401(k) or whatever, you own that. The company that sends you your statement is just providing a service to the mutual fund owners (which are the investors, i.e., you).

If you hold stock or bonds at some brokerage, that's yours. They're just providing you with the service of holding them for you.

In short, you almost certainly won't lose money. But there might be a period of time (hours, days, unlikely to be as long as weeks) when you can't access your money because of the turnover time. You probably will have to learn some new phone numbers and a new customer website, etc.

Nothing.

Nothing unusual anyway.

We do not give personal finance advice. We like the diehards, if you're looking for someone who does.

But we don't mind reminding people of the basics during a crisis:

- Don't own stocks with money you'll need in the next three years.

- If you're not going to use the money for three years, then don't worry. Markets go way up and way down. Overall, though, they go up.

- Investors who panic at times like this and sell or switch assets classes (moving, say, from stocks to bonds or to cash), are generally the investors who lose the most money. Just leave what you've got where you've got it. Rebalance only once a year or so.

- I, for one, am thrilled that I dollar-cost average. It means I know that I will, automatically, buy a lot of stock at a discount on crazy weeks like this.

- Mostly, I remind myself, over the long term, any one day is just noise.

Leather buckets used by President George Washington and his Volunteer Fire Brigade.

George Pickow/Three Lions/Getty Images

There's something about saying "No more bailouts" that appeals to the [l]ibertarian in everyone. Let Fannie Mae and Freddie Mac shrivel. What's Lehman Brothers got to do with me?

The trouble with this particular string of trouble is that it's impossible to know how much harm a failing Lehman Brothers, to name the latest belly-upper, would do to the global economy. Lehman Brothers insured loans for other banks, and now those other banks are running through their books trying to figure out whether they're still in business.

From our friends down the street at Slate comes the Big Money, a new site with the good sense to launch today, of all days. Chadwick Matlin and James Ledbetter kick things off with a tough message for bailout haters. They argue that the government should have saved Lehman. From Matlin and Ledbetter:

It is not unreasonable to think that tens of billions of dollars of capital will be wiped out across the globe on Monday as a result of Lehman's collapse; it is, after all, the first large Wall Street firm to go bankrupt in nearly two decades.

By helping Fannie, Freddie and -- earlier -- Bear Stearns, the government made a string of decisions to protect the economy from shock. By sitting this one out, say Matlin and Ledbetter, officials forced a major Wall Street firm into bankruptcy. The Big Money sums it up like this:

In short, Wall Street is entering into a brave new world in which the Federal Reserve, the Treasury, and even the Securities and Exchange Commission are vital players.

Which is kind of weird, when you think about it.

Lehman Brothers is insolvent.

When you add up all the stuff they own and all the people they owe money to, they don't have enough to pay their debtors back.

They are fully, totally, completely broke. Not just "kind of broke, but a loan from their cousin will get them through the next few weeks, 'til they close that next big deal." They are broke and have no chance of coming out from under any time soon.

Bear Stearns was a different story. Their assets were worth more (or close to more) than their debts. But they didn't have liquid assets, ready cash. Too much of their money was tied up in long-term obligations, like mortgages and loans and the like.

Think of ordering a pizza. The delivery guy comes to your door and you say, "See, I'm worth a million dollars. Just look at this house. But I don't have any ready cash in my wallet. Give me the pizza and I'll pay you back."

Bear Stearns had the million dollar house. They just didn't have any ready cash.

Lehman didn't own the house. They were homeless. In fact, they owed someone a house. They had nothing that made their promise to the pizza guy credible.

Continue reading "Illiquid Vs. Insolvent: Why Lehman Isn't Bear Stearns" >

Warren Buffet, man, is smart.

He wrote:

Charlie and I believe Berkshire should be a fortress of financial strength -- for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

When did he write that? 2002.

His stock has gone through the roof since then.

I spent Sunday, joyously, sitting at my desk monitoring the financial news.

(For those who don't know me: that "joyously" thing, that was sarcastic.)

All the news was about Lehman Brothers and whether Bank of America or Barclay's would buy them.

Then, boom, out of the blue, the news was that Bank of America was, indeed, buying a troubled Wall Street Investment Bank. But not Lehman Brothers. They were buying Merrill Lynch.

Were these things connected? Why did B of A switch over all of a sudden?

Continue reading "The Shin Bone Is Connected To ... Merrill Lynch?" >

It was a game of chicken.

In a conference room in the New York Federal Reserve Bank building, in lower Manhattan, the leading figures of the U.S. financial system -- government and private -- faced off.

On one side of a large conference room table sat Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and NY Fed head Tim Geithner, asking, begging, demanding.

On the other side sat the heads of the world's largest banks asking, begging, demanding for the opposite.

Both sides were afraid that Lehman Brothers would collapse and send the global financial system into chaos.

Continue reading "What Happened On Sunday?" >

I've been getting e-mails: What does this mean for me?

Answer: Nothing. We hope.

Continue reading "What Does Lehman Brothers' Collapse Mean To Me?" >

Here's this morning's Wall Street Journal, pouring the coffee for you:

The American financial system was shaken to its core on Sunday.

Whoa. We'll be awhile making sense of all this, but for now the scorecard reads: Lehman Brothers in bankruptcy, Merrill Lynch swallowed by Bank of America with the Federal Reserve's help, AIG looking for a lifeline, global markets flipping out, global bankers pooling money to calm the markets, investors watching a string of other banks for signs of collapse. (Wall Street Journal, New York Times, NPR, Calculated Risk)

Once you get past the huge headlines, you can start seeing the particular reasons for fear. One of the scariest factors here is something called a "credit default swap." After the jump, an explanation.

Continue reading "What's The Deal With 'Credit Default Swaps'?" >

Lehman is NOT big enough.

Which raises the question: how big is Too Big To Fail?

When I first started reporting on economics, I had no gut sense of what big numbers mean. I knew, of course, that a trillion is a thousand billion. A billion is a thousand million, et cetera. But I didn't have any sense of what those numbers really meant to the world economy.

Here's what I have learned:

A trillion is A LOT of money. How much? The whole global economy--all the money spent every day in every country in the world--is around 50 trillion. The U.S. economy is about a quarter of that: 13 trillion.

Fannie Mae and Freddie Mac, together, held about 5 trillion dollars in debt. That's a lot. A lot. A lot a lot. These two companies--and they are private companies, even if they have a special status in the US legal system--were bigger than most countries.

Lehman is nowhere near that big. They are worth in the single- to double-digit billions (or they were). That's just not real money to the global economy.

So, no, they were not too big to fail.