The Benny (on the) Hill Show

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New York gold prices traded in restrained albeit lower trending patterns during this midweek session. The yellow metal moved back and forth between $879 and $903 per ounce, but remained confined to the $875-$925 channel as participants followed Mr. Bernanke's Plan "P" sales presentation on Capitol Hill for a second day. Traders are seen as still reluctant to take significant positions before the rescue plan takes final shape. Volatility will remain visible so long as the package faces fresh legislative headwinds and uncertainty continues in other markets. We are talking about a timetable here that extends well into the coming week. At least. Gold was last quoted at $879 down $13, silver at $13.24 down 4 cents, platinum at $1184 down $18 and palladium the lone gainer, up $3 at $249 per ounce.

There are at least five issues currently on the table before the $700 billion solution is activated. They involve capping executive compensation, equity participation in these institutions by US taxpayers, whether or not to pay for the costs of the plan in several installments, requiring banks to pay into a pool designed to offset the huge price tag, and finally, a complete overhaul of the financial regulatory system by next spring. Each one of these issues is ambitious, contentious, and is sure to please and/or offend some groups. The one thing that appears not to be in debate, is doing nothing and letting the highly interconnected global financial system collapse onto itself.

The US dollar was up a tad, at 76.80 on the index, while crude oil lost just over $1 to $105.60 per barrel. Gold will continue to benefit from the funding squeeze that continues to chill markets but still has its buyers wondering why it has not left the $900 station in a major hurry to somewhere beyond the $1,000 mark, given the current apocalyptic conditions. These are, after all, looking like the end-time scenarios which many had written about for decades. Gold pundits and mining company heads keep proclaiming that the metal has nowhere else to go, but well into the four-digits on the price charts. A simple look under the hood of this crisis would be sufficient to ascertain that there is no guarantee of any Weimar republic-style hyperinflation resulting from the process. Although the invoice for the solution is the largest on ever presented to US taxpayers, so is the magnitude of the problem that faces them. Comparisons to Pearl Harbor and similar events are not in short supply in the media and on Main Street.

The planet's wealthiest and most astute value hunter - Warren Buffett - stepped up to the Wall Street donation box offering a $7.5 billion life preserver to Goldman Sachs. The 78-year old mega-mogul is now entitled to don a red cape and motivate peers such as Bill Gates, Larry Ellison, or the Google Boys to follow his altruistic and patriotic example and put some of their fortune into the very economy that has enabled them to become who they are. We have also heard from the world's largest bond manager - PIMCO's Bill Gross - and he offered to manage the money involved in the plan for no fee whatsoever. Not sure what the President will have to say later this evening, but he is sure to ask for some kind of cooperation from Mr. & Mrs. Brainsample in Peoria. Question is, how the plan will play in that town...

Plan "P" has already hit several speed bumps in the Senate yesterday and today, and it is unlikely to be adopted in its current guise by US lawmakers who are feeling the heat from those who elected them. As there is no plan "B" in the Bernanke/Paulson bag of tricks, the bailout package will have to be nipped and tucked so as to make it more palatable to those who only see it as a rescue of the firms that got the world into this mess to being with. Fannie, Freddie, Lehman, and AIG have become the targets of FBI probes intended to find possible fraud at the heart of the meltdown that shook America. Street talk tells of possible 75% cuts in executive compensation and the Democrats have been heard demanding that the recipients of golden parachutes return the gold and keep only the parachute. Voters are visibly angry and will demand more than the promise of oversight and fair play. At the UN yesterday, several speakers were heard taking joy in America's misfortunes and ridiculed the idea of stepping up to help it, despite the deleterious effects that a US meltdown would have on their own economies as a result.

The Bush administration and Republican candidate McCain are losing the critical support of some of their most vocal and long-time cheerleaders such as columnist George Will and Senator Graham (S.C.). Many in the electorate see the bailout and the salesmanship it received yesterday as a replay of the hearings in which the Iraqi WMD excuse was being used to convince lawmakers to give a thumbs-up to going to war. Certainly, if one watched Mr. Paulson describe in gory detail the possible effects of the Financial WMDs that Wall Street has unleashed upon the US economy, there was no time to waste in approving the "War on Subprime Terror." Some financial writers have joined a very small start-up tinfoil hat club that believes these massive Wall Street cave-ins to have originated overseas and that they may eventually be found to bear the fingerprints of economic terrorism. As in, an economic 9/11. To underscore the importance of the event, we might simply take a look at the fact that candidate McCain has just suspended his campaign to travel to Washington for crisis resolution talks. Postponed debates? Likely. Postponed elections? Possible.

Buyers of straddle investment vehicles might end up being the wisest of all, among anyone still participating in these markets, this week. Gold, oil, currencies, stocks, continued their volatile sessions and went nowhere in particular in fits and starts. Indecision reigns supreme, volatility is running amok. Profit-taking in gold continued today as players watched a second day of Senate testimony by Ben Bernanke. The Fed Chairman took center stage today and his words drowned out everyone else's as if the country was not some 40 days away from electing its next leader. Friday's Presidential debates might generate less of an audience than competing TV shows by Cramer, Mr. Kudlow, or "On the Money." One more reason the candidates are apparently taking a break and are trying to appear as on top of the issue.

Speaking of which, many have already shelved the very idea of Wall Street. Let's see what Marketwatch's David Weidner has to say about that:

"Things have been happening pretty fast, but it's kind of funny how quickly people have come to some ironclad conclusions: Wall Street as we know it is dead. Risk is gone. Trading is over. Deposits are king.

Goodbye, Dick Fuld and credit-default swaps. Hello, Ken Lewis and three-year certificates of deposit.

If only it were true. Wall Street is wounded, but far from dead. There are many firms ready to step up to the other side of the trade and provide leverage to make the markets nice and dangerous again. Some of those market participants may be newly minted commercial bank holding companies.

"These guys aren't stupid," said Joe Saluzzi, co-head of equity trading at Themis Trading, a buy-side advisory firm. "Right now, the first thing they're doing is saving themselves ... someone will fill the void."

Late Sunday, Goldman Sachs Group Inc. and Morgan Stanley said they will become bank holding companies. Everywhere, Monday morning, there were epitaphs for Wall Street.

Goldman and Morgan's "new status reflects a new reality. Investors have lost faith in wholesale funding models," The Financial Times wrote in its Lex column. Regulators insist on "less leverage."

"Goldman, Morgan scrap Wall Street model, become banks in bid to ride out crisis," The Wall Street Journal shouted Monday, adding that the move was "the end of traditional investment banking and ... (the beginning of) stringent new capital requirements."

The "end of capitalism as we know it," MarketWatch economist Irwin Kellner concluded.

Christopher Cox, chairman of the Securities and Exchange Commission, may as well go play a round of golf, if he hasn't lowered his handicap this year enough already.

Filling the void

Wall Street is changing, but not in the way some would have you think. For instance, new oversight by the U.S. Federal Reserve isn't so new. Fed bankers have been on site at investment banks since Bear Stearns Cos. collapse in March. Their presence and influence were part of the deal that gave broker/dealers access to Fed funds.

"It does not mean they are going to be commercial banks, it means they're going to accept the regulatory structure," said Roy Smith, a former Goldman partner, now a professor at New York University. "They have been complying with (international bank) capital requirements for several months."

Merrill Lynch & Co.Morgan Stanley, Goldman and even Lehman Brothers Holdings Inc. , before its demise were cutting leverage and reducing loan exposure to customers. The change in regulatory status is happening at the holding company level. Investment banking arms are alive and well.

"They're not disappearing at all," said Fred Joseph, former chief executive of Drexel Burnham Lambert, now managing director of the advisory firm Morgan Joseph & Co. They will act more like advisory firms and underwriters and lenders. They'll act a little bit more like banks, and less like hedge funds."

In their absence, hedge funds, private equity firms and boutique investment banks have been picking up the slack. Earlier this year, Citadel Investment Group reportedly had a loan agreement with Fortress Investment Group Inc. As the recent spate of hedge fund closings suggests, not everyone is prospering. Hedge funds that rely on securities loans, or what the industry calls margin, are hurting, according to Matthew Simon, a research analyst at Tabb Group, Wall Street research and advisory firm.

For bigger firms, "The market will find a way to prevail," Simon said "Investors that need capital will find a way to get to the capital."

Tougher Wall Street

So, while it's true the credit picture is getting momentarily tighter as players seek new partners, there's hardly some new paradigm shift taking place.

The industry-leading prime brokerage business at Bear Stearns is still cranking, only now it's under the name J.P. Morgan Chase & Co. . Goldman's in-house, but off-balance sheet hedge funds have not been shuttered. Proprietary trading will diminish, but it won't disappear unless there is "some future restriction on leverage that doesn't exist right now," Smith said.

If risk-takers don't like tighter controls they will be free to launch their own trading businesses -- hedge funds or even the $10 billion a year prime brokerage business. Private equity firms might be comfortable with the risk those businesses take. "They're sitting on cash waiting for the right opportunity," Saluzzi said.

It may not come. Merrill can be Merrill, Goldman can be Goldman. The people at the top really have to cut the power if they want change. Federal oversight will mean more transparency, but without new laws, we might not like what we see.

After all, commercial banks fail too.

In the absence of a "P" Plan resolution, we would personally opt to remain sidelined as anything is possible. This, right here, and right now is an October surprise that is big enough to alter many a timetable and priority list. On Wall Street, as well as on Main Street. Your own street as well. Not to mention the one at 1600 Pennsylvania Avenue.

Happy Channel Surfing.