While the collapse of Bear Stearns and financial industry losses now topping $400 billion, many lawmakers and regulators are calling for increased regulation of the banking industry. But a parallel argument has been pointing in the opposite direction: loosening some regulations to allow private equity firms to invest more in banks.

The losses have forced banks to raise somewhere around $400 billion in new capital (the number changes every couple of days, so we forget exactly how much), much of which is now under water from further losses. With estimates of further losses totaling as high as $1 trillion to $2 trillion, many now wonder where the banking industry will find new capital to replace these holes.

One answer might be the government, although contracting revenues due to a dithering, recessionish economy may limit this option. Others have proposed easing rules that have discouraged private equity firms, which have something like $400 billion of capital on hand, from investing in banks.

There’s no doubt that the last year of turmoil in the financial markets has rearranged the rankings of investment banks, hedge funds and private equity firms. We’re in a Nietzschean period, with a revaluation of all values (and a devaluation of most values).

So which firms have come out on top? The lads and lasses at HereIsTheCity, a London financial gossip sheet, has decided to rank financial firms according to the preference of employees and job-seekers. What are the prizes in the new financial economy? What are the “safety schools?” Although the methodology behind the rankings is a bit mysterious, HITC takes into account job security, work/life balance, job satisfaction, compensation/benefits and staff morale to create it’s rankings. They present this as a ranking of which firms are “in vogue” or “hip” right now.

The results are controversial. Working for the Financial Service Authority ranks above working for Goldman Sachs. DE Shaw is the first rank private equity shop. Wachovia Securities is dead last.

After the jump, we bring you HITC’s top ten and a link to the full list.

A columnist for ESPN’s website recently received a letter from the chief executive of TD Bank asking him to stop mocking the name of the sports center that is home to the Boston Celtics and the Bruins. Bill Simmons, who is often called by his nickname “The Boston Sports Guy,” described the message from the CEO as “the most eye-popping email” he had ever received.

Read the email after the jump.

David Ellis asks who might “fill the hole” in the investment banking world left by the collapse of Bear Stearns. The usual names get bandied about: Blackstone, JC Flowers and Citadel are the top contenders. All three have expanded into areas traditionally dominated by investment banks. And, as Ellis points out, in the not-so-distant past we’ve seen smaller firms—Lehman Brothers, for instance—grow into Wall Street powerhouses.

This kind of speculation is fun but it’s important to remember that the brokerages and investment banks as we know them are largely a child of regulation that split commercial banking and investment banking. Many of those regulations have been reversed, which has helped lead to the consolidation we’ve seen in the past decade or so. What’s more, investment banks may now face even greater regulation—and therefore higher barriers to entry—in the form of new regulations in exchange for access to the Federal Reserve’s borrowing window. New capital requirements and leverage limits could reduce the profitability of investment banking, making it less attractive to new entrants. Ironically, the problems of the investment banks could wind up shoring up their market positions by stifling competition.

Perhaps the best case scenario is a that the coming regulatory schema could allow for a division of investment banks—with some opting for access to the Fed window in exchange for increased regulatory supervision and leverage-lowering capital requirements while others—perhaps up-and-comers like Citadel—opting to operate with more risk, more leverage and less oversight.

Filling the Bear Stearns void [CNN Money]

This morning we asked whether the firing of Ken Thompson would lead to a new bloodbath at the top of our financial institutions. A few hours later Washington Mutual took away the chief executive Kerry Killinger post as chairman of the company’s board. Killinger has been running as a close second to Thompson as the most despised chief executive running a bank. There’ve been many calls for his head upon a platter. So how long has he got?

Felix Salmon reminds us that there were just 24 days between Thompson losing his chairmanship of Wachovia and his firing.

“At that rate, Kerry Killinger … is likely to be fired on June 26. Mark your calendars!” Salmon writes.

Whither WaMu’s Killinger? [Portfolio]

Just like the real estate agent who is heroically solving Califorina’s oversupply of housing by giving away one house when you buy another, Wall Street firms are courageously propping up their own balance sheets by booking gains as a result of declines in their own creditworthiness.

Here’s how it works. The banks are taking advantage of rule that allows them to count the value of the debt they owe as decreasing then the market prices for their debts fall. The rule is the mirror image of the “mark-to-market” accounting that has forced them to write-down assets such as mortgage securities that trade at lower levels than they expected.

This story has been around for a few weeks now. But it’s getting more attention today. Some people are wondering if those downgrades from S&P could actually boost bank’s balance sheets by providing new room for these dreamy accounting fixes.

After the jump, Dick Bove explains the difference between the new Wall Street accounting and reality.

So maybe trouble at Lehman Brothers isn’t just short-sellers spinning a web of financial panic after all. Standard & Poor’s cut the ratings of Lehman Brothers, as well as Merrill Lynch and Morgan Stanley today. Counterparty credit ratings, which have been getting a lot of attention lately, were one prong of the S&P credit analyst Tanya Azarchs critique of the banks. The weakness of investment banking business—IPOs off 70% and M&A down 40%, according to some estimates—and the potential for more write-offs didn’t help either.

Azarchs is also criticizing the brokerages’ much vaunted capital raising. A good portion of the money raised by the firms has been in so-called hybrid securities that combine equity and debt aspects. The ratings agencies are wary of these because certain debt-like covenants and payment obligations can impose increased cash flow stress on banks.

The stock prices have taking a beating and the credit-default swap spreads are getting wider.

The larger commercial banks also didn’t escape S&P’s negativity on the financial sector.

Ever since the Federal Reserve began allowing investment banks access to a special borrowing facility, there have been predictions and calls for the Fed to start regulating investment banks. Now it seems the investment banks are split about whether access to the emergency window is worth the price of new regulations.

More after the jump.

The irony of the failure of some of Wall Street’s biggest institutions to manage risk properly is that the consolidation of banks and brokerages—which many cite as exacerbating the crisis—is likely to accelerate. Indeed, it already has, with JP Morgan Chase swallowing Bear Stearns. Increased regulations and government oversight, which increases the overhead costs of compliance, are likely to increase the pressure to consolidate.

But shouldn’t it be the other way around? Shouldn’t the government begin to wonder what can be done so that the failure of a single bank or brokerage doesn’t necessitate extraordinary government intervention? In a new essay in the Washington Independent Jonathan Macey, a professor at Yale Law School, argues that the government should use antitrust laws to break-up “too big to fail” banks.

After the jump, Macey’s plan and why it won’t work.

The $13.25 billion acquisition of Electronic Data Systems by Hewlett-Packard—the ninth largest tech deal ever, according to DealLogic—has moved the M&A league table standings, DealJournal Heidi Moore reports. Before the deal was announced, Goldman Sachs and Morgan Stanley led this year’s ranking from advising technology companies on mergers. But neither bank has a role in the H-P deal, pushing them down in the rankings

“Goldman ranked first with $14 billion of announced deals to its credit this year, and Morgan Stanley ranked second with $11 billion according to investment-banking research provider Dealogic,” Moore writes. “But now, Goldman is in third place, displaced by Lehman Brothers and J.P. Morgan. Lehman has jumped from fifth to first place with $17 billion of deals to its credit, while J.P. Morgan — which, just yesterday, languished in seventh place with only about $2.2 billion of tech deals to its credit — has vaulted to second place in the rankings from seventh place. Morgan Stanley has fallen to No. 5.”

Citigroup and Evercore Partners advised Electronic Data on the deal. J.P. Morgan Chase and Lehman Brothers advised Hewlett-Packard.

Hewlett-Packard: The Advisers [Deal Journal]

On Tuesday, March 11, Federal Reserve Chairman Ben S. Bernanke lunched with what Bloomberg is describing as a “Who’s Who of Wall Street leaders.” Attendees JPMorgan Chase ‘s Jamie Dimon, Goldman Sachs’s top dog Lloyd Blankfein, Lehman Brothers boss Richard Fuld, Morgan Stanley President James Gorman, Citigroup’s consigliore Robert Rubin, Blackstone Group’s little big man Stephen Schwarzman and Merrill Lynch’s John Thain.

Guess who wasn’t at the lunch? If you answered “anyone from Bear Stearns” you’d be absolutely right. Now some are speculating that Bear Stearns may have been purposefully excluded because its fate was one of the topics of discussion.

“It doesn’t seem credible that just about every major financial institution in the United States, except Bear Stearns, had a meeting about the most pressing issue of the day, bank liquidity, and the subject wasn’t about Bear Stearns, who had rumors swirling about them since Monday,” Eric Salzman at the Monkey Business blog says.

What was discussed at the luncheon has not been revealed. Bloomberg News obtained Bernanke’s schedule and the list of attendees in response to a request under the Freedom of Information Act. But the timing seems is jarring. Rumors of liquidity troubles at Bear had prompted the bank to issue a denial the day before for the lunch. On the preceding Friday, one bank (which has not been identified) refused to make a short term loan of $2 billion to Bear. The meeting came hours after Bernanke announced plans to lend $200 billion of Treasuries in exchange for debt including mortgage-backed securities. Hours after the meeting every bank on Wall Street reportedly began refusing to issue credit protection on the debt of Bear. Two days later Bear Stearns chief executive Alan Schwarz would be forced to call Dimon to seek $30 billion in emergency funding.

Update: Was Bear left out because its top two men were out of town? If we recall correctly, Schwarz was down at the Bear Stearns Media Conference in Palm Beach around this time, and chairman Jimmy Cayne was flying out for a bridge tournament in the midwest.

Bernanke Lunched With Dimon, Rubin Before Bear Rescue [Bloomberg]

To hear the heads of Wall Street’s largest financial institutions speak, the worst of times are behind us. But a new wave of pressure seems mounting as corporate borrowers get squeezed by tightening credit and a slowing economy. High yield bond defaults are up and going higher as companies find lenders unwilling to refinance risky loans (non-investment grade lending is down 70% this year). And now companies have begun drawing down on their revolving lines of credit, sucking even more capital away from Wall Street, the New York Times is reporting.

Those of you not involved in corporate finance might not appreciate how much banks hate when borrowers draw down on revolving lines of credit. Typically a corporate borrower will have a revolver built into its larger credit facility. But unlike bond issuances and syndicated term loans, banks cannot easily hand the credit risk and capital requirements onto other investors. In short, when borrowers draw down revolvers that money comes out of Wall Street’s coffers.

Banks are already under tremendous balance sheet pressure following the $300 billion write-downs and credit losses over the past year, and the threat of corporations drawing down their revolvers could exacerbate the situation. The New York Times, in a somewhat panicky tone, notes that in a worst case scenario of massive revolver draws, banks could be forced to sell assets or raise money to cover the loans.

The banks are downplaying the risk, of course. “Even in the most volatile markets, including last summer, we have seen very few companies draw down their revolvers,” Chad Leat, chairman of the alternative asset group at Citigroup, tells the Times. “Occasions when it did happen have been unique.”

We find this completely reassuring. Banks, especially Citigroup, have proven so effective at anticipating crises in the past year that we wouldn’t even dream of doubting Chad.

Banks Fear Increased Demand for Corporate Emergency Loans [New York Times]

There are gray storm clouds hanging over Wall Street this February but Merrill Lynch’s Greg Fleming appears to be weathering the storm. The Securities and Exchange Commission has initiated a formal investigation into whether the brokerage knew more than it revealed to shareholders about the value of its subprime investments prior to announcing the giant write-downs with its third-quarter results. Federal prosecutors have opened a preliminary investigation, leading to speculation that criminal charges could possibly brought against some Merrill executives. But sources at Merrill Lynch say Fleming, who continues in his role as president of the bank after the losses forced the departures of a co-president and the chief executive, was not involved in the businesses reportedly being scrutinized and they do not expect him to be a subject of the investigation.

Wall Street abounds with speculation that Greg Fleming, who has managed to hold on to his position as sole president of Merrill Lynch through a whirlwind of management changes, might finally be facing a challenge that could shake him out of his elevated position.

Fleming’s presidency has endured the worst losses in the history of Merrill, internal criticism, and alleged pressure from newly minted chief executive John Thain. Although the Justice Department’s investigation is in its earliest stage, rumors are already spreading, both within and outside of Merrill, that the threat of a criminal investigation might bring Fleming down.

Despite rapid changes in the management structure at Merrill Lynch, Greg Fleming has held onto his position as the president of the firm. He has insisted that he will remain the sole president, and resisted any plans to elevate others at the firm to be co-president. But his inflexibility on this point may be imperiling his position, according to people familiar with the situation.

“He’s on the verge of a nervous breakdown,” a source tells DealBreaker. Others dispute this characterization however, saying that Fleming shows no signs of anything like “a nervous breakdown.”

When John Thain took over as chief executive of the bank, one of the very first changes he announced was a flatter management structure. More executives now report directly to Thain, in effect circumventing Fleming’s office. Under Stan O’Neal, the risk management executives did not report directly to the top—a situation which has been blamed for some of the excesses that lead to enormous losses over the last several months.

Fleming, who also serves as chief operating officer and oversees the investment banking business, is said to have dug in as president, and told others that he will not accept a co-presidency with others at the firm. This is seen by many as resisting the flatter structure Thain is putting in place, and may be alienating him from others at Merrill. Perhaps more important, Thain is thought to be chagrined by Fleming’s stance.

“Fleming could have been a team player. He’s still got the investment bank under him,” said one person with knowledge of the dynamics within the firm. “But he went the other way. He saw moving back to being just head of investment banking as a demotion.”

Some feel that the flatter management structure has effectively demoted Fleming already. With the new head of risk management, the top spokesperson, their general counsel, the chief financial officer and the brokerage head of the brokerage arm, among others, reporting directly to Thain, the office of the bank’s president may be superfluous. Last week, both Market Watch and Bloomberg referred to Fleming as the “chief operating officer” of Merrill without mentioning his role as president.

Fleming remains respected as an investment banker at the firm, even by those who are surprised at his alleged inflexibility. He remains youthful, plain-spoken and full of energy, according to people at Merrill Lynch. He is known as a perfectionist and an investment banking star—which is all the more reason his continued grasping to the title of sole president has some feeling “mystified.”

Merrill Lynch would not comment on this story.

Bear Stearns has more than $1 billion of short positions on subprime, up $400 million from the end of November, Bloomberg reports. Of course, since Bear Stearns got the subprime trade so wildly wrong last year, people are already wondering if this might be a signal that it is time to go long subrime.

Over at The Big Picture, Barry Ritzholz writes, “While I do not expect us to be done with the subprime slime yet, I do get a ‘Is this a bottom indicator?’ sense from Bear on this.”

JPMorgan Chase, which emerged relatively unscathed from the credit market debacle, is apparently taking the opposite position. Yesterday Jamie Dimon was reported to have said that the bank plans to expand its role in the subprime mortgage business. Goldman is also rumored to have reversed it’s position on subprime, taking a net long position.

Bear Stearns Is `Short’ Subprime Mortgages $1 Billion [Bloomberg]

Yesterday we heard two discordant voices on the possibility of the monolines getting downgraded. Jamie Dimon, the chief executive of JPMorgan Chase, said that he does not think downgrades of the insurers would be “a big deal.” Deutsche Bank chief Josef Ackerman, however, described the potential downgrades as “a tsunami-like event comparable to subprime.”

So who is right? Well, maybe both chiefs are. As Yves Smith has explained, the European banks were major buyers of CDOs and RMBS. Operating under Basel II, which links reserve requirements to the riskiness of a bank’s investments, the Euro banks were able to treat triple A paper as basically risk free investments they could hold without impacting their reserve requirements. But a downgrade of the insurance on this paper could result in the banks having to bolster their reserves, possibly worsening the credit crunch or requiring a firesale of the CDOs

“A downgrade to AA increases the reserve requirements markedly, and CDOs are generally downgraded more than a mere grade or two when they fall (I wish I could be more crisp here, but Basel II makes matters more complicated). Thus a loss of the bond guarantor AAA has a quick and nasty impact on bank capital adequacy,” Smith writes.

Which is to say, because Basel II requires banks either to hold highly rated (and, on paper at least, less risky) portfolios, or to hold high levels of capital in reserve, the banks could be forced to slow lending in order to accumulate capital, go hunting for additional capital injections or sell off their now risky CDO portfolios.

In the US banks had less incentive to invest in highly rated paper because they have been required to hold the same amount of capital against AAA-rated paper as they do against BBB-rated paper. This is the most likely explanation for why the European banks are more worried about a downgrade of the monolines than their US counterparts.

Deutsche Bank CEO: Bond Insurer Downgrade Will Create Debt ” Tsunami” [Naked Capitalism]

Credit Suisse is totally not going steady with Bear Stearns. Ruddy Brady Dougan—the Irishman who is somehow chief executive of the Swiss bank—told Credit Suisse bankers at the meeting of the Committee To Run The World in Davos, Switzerland that a deal to acquire Bear Stearns is a “non-starter,” according to Mark DeCambre at TheStreet.com.

But now everyone is awkward about it. Bear spokespeople decline to comment, look away embarrassed. The Swiss aren’t talking either, just staring down at their shoes mumbling about already having plans and such.

Credit Suisse CEO Squashes Bear Stearns Takeout Talk [TheStreet.Com]

So who is on this list of 14 companies under investigation by the FBI for their involvement in the subprime mortgage crisis? The FBI apparently intends to keep us in suspense because they won’t give details. All we know is that they are looking into “allegations of fraud at various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.”

So let’s recklessly speculate. Two companies that are sure to be on the list are Bear Stearns—which is already under investigation by federal prosecutors and the SEC—and Countrywide, which is both the biggest home loan lender and also facing an SEC inquiry. Goldman Sachs is very likely on the list. It was accused on the pages of the Sunday New York Times of misleading clients by packaging CDOs while shorting the mortgage market. We know that at least one Senator read the article and has been making a stink, and we know that federal investigators often get their leads by reading the paper. What’s more, Goldman Sachs has said that it is cooperating with an unnamed government agency.

Morgan Stanley has also admitted to cooperating with unnamed government authorities. At first, everyone assumed this was the SEC. But why wouldn’t they come out and say that? More likely they declined to name the agency out of fear that saying they were cooperating with the FBI would tar them with serious criminality—rather than the everyday Wall Street shenanigans implied by an SEC investigation.

So that gives us four good leads. Who else is a cylon on the list? No doubt some additional mortgage companies and some home builders. Maybe the ratings agencies are also. Leave your guesses in the comments section below.

FBI Launches Subprime Probe [Wall Street Journal]

Unsurprisingly, only one of these little elves is smiling.