Private equity firms are likely to invest in more bank deals as they look to take advantage of depressed share prices and if the government steps up to help, a new study predicts.

The U.S. Federal Reserve made it easier for buyout shops and others to invest in banks on Monday, relaxing some rules regarding minority shareholder investments. Many investors have been wary of getting subjected to banking regulations, which can be onerous and restrict their business activities.

But what really gets potential private equity bank investors exicted is the U.S. government’s proposed a $700 billion bailout fund.

A more active role for private equity would be welcome to capital-starved banks and would reverse a recent downward trend.

Private equity investment in financial institutions has declined this year after more than tripling to $71.4 billion in 2007 from $23.7 billion in 2004, according to the report by Freeman & Co, an independent financial services adviser.

The first half of this year saw deals with a combined transaction value of $12.4 billion compared with $19.7 billion over the same period last year, it said.

“Recent private equity investments in capital-deficient global broker-dealers and large money-center and regional banks have proven difficult in the short-term,” said Peter Majar, a managing director at Freeman. “But we feel many new opportunities will emerge in the post-U.S. Government bailout period, provided a sufficient plan is finalized.”

Some AIG employees want former chief executive Maurice “Hank” Greenberg back at the insurer’s helm — at least based on comments scribbled on a portrait painted by artist Geoffrey Raymond.

Dozens of AIG employees signed the portrait — set up across the street from AIG’s Pine Street headquarters on Monday. Among the annotations: “Please, please come back,” and “Trust in Hank.”

Greenberg over a 38-year reign grew AIG from a small, foreign insurer into the world’s largest insurer by market value. He stepped down in 2005 after regulators laid allegations of accounting fraud against him and the company.

Over the last year, massive mortgage losses crippled AIG. It narrowly escaped having to file for bankruptcy last week by accepting a costly government bailout.

The portrait of Greenberg — annotated in blue by AIG employees, and in red by all others — will be sold on eBay.

Raymond’s portraits have become a fixture on the sidelines of the credit crisis. In the midst of Bear Stearns’ 11th-hour takeover by JPMorgan, the artist invited passers-by to scribble comments on a portrait of James Cayne, the bank’s former chairman. And he re-appeared again outside of Lehman Brothers with a portrait of CEO Richard Fuld after the company sought bankruptcy protection.

Financial blogger Barry Ritzholtz of The Big Picture has some questions for Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke ahead of their appearance on Capitol Hill on Tuesday, starting with a biggie:

You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word “Contained.” Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago. Question: Why should we trust your judgment on the largest bailout in American history?

There are 13 more in that vein, plus a “bonus comedy question” — or at least what would have been comedic if the leading lights of American capitalism were not carrying out an unprecedented governmental intervention in the free market:

Are you now, or have you ever been, a Socialist? Do you know, or associate, with other Socialists?

What questions would you like to ask Paulson and Bernanke? Put your best nominees in the comments section.

Like a leaky boat, Wall Street just keeps sinking amid controversy over the proposed government bailout. And Fed chief Ben Bernanke has poured more cold water on the investing mood by saying global markets remain under extraordinary stress.

Stock futures are pointing lower as Congress has shown some reluctance to rubber-stamp the $700 billion bank rescue plan, which some say could create more problems because of the ballooning deficit while not resolving the credit crisis.

But while not everyone loves this bailout, it appears to be all we’ve got.

The good news is that oil prices, whose huge gains also wigged out the stock market yesterday, have also fallen.

U.S. Treasuries are mostly higher, while the dollar is steady against an index of major currencies.

Home builder Lennar reported a smaller-than-expected quarterly loss, although revenue plunged 53 percent.

Kohlberg Kravis Roberts - a private equity firm that is planning on going public - posted a net loss for the first half of 2008, compared with a year-earlier profit.

– Lisa Von Ahn

Has Japan ever really gotten over the excesses of the late 1980s? Or has the hangover turned into a malaise — in which assets that the banking system there seemed designed to preserve rather than clear — that has made recovery something forever elusive? With the United States facing its biggest bailout ever, U.S. policymakers could learn how not to do things from Japan.
 
At a trillion dollars, the bailout could jack the U.S. debt-to-GDP ratio up to 70 percent. At the end of last year, the ratio in Japan was 80 percent. A huge bailout bill is scary because the mammoth issuance of new debt should make U.S. bonds, and the dollars they are printed on, worth less, forcing the U.S. to offer ever higher rates of return. 
 
Has that been Japan’s experience? By the end of the last century, more than a decade after the asset bubble there burst, rates were so low as to hamstring policymakers battling persistent periods of deflation. Even now, despite the huge amount of Japanese debt, the currency — with very low interest rates — remains the favored funding currency for the ever-popular carry trade, where investors borrow yen and lend in a higher-yielding currency, like the Australian dollar. Its debt remains some of the most richly priced in the world. 
 
And now Japan’s banks, unable to become more dynamic in a home market that was forced to bail them out just a few years ago, appear to be interested in taking on moribund assets abroad. Well, at least they have a lot of experience with this stuff.

Other deals of the day:

* British business and IT consultancy Charteris said it acquired rival SIG Consulting for a maximum 2.5 million pounds in cash and shares.

* Emirates Telecommunications (Etisalat) said it agreed to buy about 45 percent of India’s Swan Telecom for up to $900 million.

* Iridium Holdings has agreed to a reverse merger with a listed affiliate of investment bank Greenhill & Co valuing the satellite-phone provider at about $591 million, the Wall Street Journal said.

* Germany’s RTL bought a 66.6 percent stake in Alpha Media Group for 125.7 million euros ($184.2 million), marking its entrance into the Greek television market.

* Kookmin Bank plans to sell back its 14.9 percent stake in ING Group’s South Korean unit to the Dutch group, and is mulling the acquisition of a domestic brokerage, the South Korean bank said.

* Telecom Italia could be interested in a tie-up with South African mobile phone operator MTN Group, Corriere della Sera newspaper reported.

* British coal miner Caledon Resources said Polo Resources upped its stake in the company to about 55 million shares, or 26.3 percent, from about 54 million shares.

* Sterlite Technologies is in advanced discussions to acquire U.K.-based cabling company Brand Rex for about $55 million, a newspaper said citing sources.

* Abu Dhabi investment agency Mubadala Development said it had bought a 50 percent stake in Los Angeles-based Kor Hotel Group to expand the hotelier overseas.

* Anglo-Australian gold miner Medusa Mining described as “inadequate” a A$182 million ($154.6 million) takeover offer by Hong Kong-based merchant bank Crosby Capital.

Excluding the value of Lehman Brothers’ Seventh Avenue headquarters, Barclays is only shelling out $250 million for the other Lehman assets it snapped up last week when it bought the bankrupt investment bank.

That’s a bargain next to the $400 million the British bank agreed to pay in early 2007 for the right for 20 years to have the soon-to-open home of the Brooklyn Nets named the “Barclays Center” and create brand recognition.

When Barclays signed the deal, it raised the question why a foreign bank like Barclays, widely unknown to U.S. consumers, would spend a small fortune on naming rights, especially since it doesn’t operate retail branches.

But in the past few years, financial firms have been all over arena and stadium rights.

In November 2006, Citigroup agreed to pay $400 million for the naming right to the New York Mets’ stadium, where they start playing next year. And in January 2007, Prudential Financial paid more than $100 million for the right to name the new home of the National Hockey League’s New Jersey Devils, which they moved into last year. The New York Post also recently reported that Bank of America, another bank that profited from the current crisis when it snagged Merrill Lynch last week.

But one marketing expert thinks right now, the public may take a dim view of all these stadium and arena sponsorships.

“People want to see companies be prudent,” said Bob Passikoff, president of Brand Keys. Not spend millions of dollars to slap their names on an arena while so many financial institutions are asking for a bailout.

Bear, gone. Lehman, gone. Merrill, gone. And now Goldman Sachs and Morgan Stanley are to be transformed into deposit-taking, Fed-governed, ATM-fee-charging old-school bank holding companies. It’s not like they’re starting out at the bottom. The Wall Street Journal reports the agreement with the Fed puts Goldman at No. 4 in terms of outright size, behind Bank of America, JPMorgan and Citigroup. 
 
After the Fed move, a mooted merger with the banking group Wachovia was no longer Morgan Stanley’s priority, a person familiar with negotiations said.  What made the investment banks mighty was the leverage that they have now been denied. Everyone seems to agree the leverage model is broken, and with recession-wary Americans unlikely to fill Goldman and Morgan coffers with deposits any time soon, watch for these new banks to look to buy up other banks and their depositors as they enjoy their second mortgage on life.
(Photo credit: IMDB)

Other deals of the day:

* Japan’s Nomura Holdings has reached a deal to buy the Asian operations of Lehman Brothers, a source said, outbidding other banks seeking to scoop up Lehman’s Asia group on the cheap.

* Czech generic drugmaker Zentiva accepted a higher takeover offer from France’s Sanofi-Aventis that values Zentiva at around 1.8 billion euros ($2.6 billion), the companies said.

* Russia’s Onexim Group will pay $500 million for 50 percent of Renaissance Capital, one of Russia’s biggest homegrown investment banks, Onexim’s chief executive Dmitry Razumov told reporters.

* Ayala Corp, the Philippines’ oldest conglomerate, said it launched a $290 million tender offer locally and in the United States to raise its stake in outsourcing firm eTelecare Global Solutions .

* British Gas owner Centrica said it was acquiring Caythorpe Gas Storage from Warwick Energy for 70 million pounds ($130 million).

* Seamico Securities, Thailand’s fifth-largest broker, said it raised its stake in KTB Securities, a subsidiary of Krung Thai Bank, to 48.81 percent from 42 percent.

In a mutual exchange of affection that would make Barney the Dinosaur proud, rivals Goldman Sachs and Morgan Stanley each issued research notes today praising each other’s business models and stability, following a week that saw shares in both stalwart investment banks swoon and some of their rivals fail.

Goldman’s note, issued this morning, got the lovefest going. It said that the decline in Morgan Stanley’s stock was “exaggerated” by those naughty short sellers. It praised Morgan Stanley as “well positioned to capitalize on future opportunities,” and said, “We believe Morgan Stanley is sound as an on-going entity, ” Not exactly poetry, but heartfelt.

Morgan Stanley reciprocated with its own note about Goldman that said, “business model fears are overdone,” and that “GS has the necessary breathing room to address these questions in a more reasoned manner.”

Both banks may have a reprieve from the stress of shotgun weddings after the U.S. government began crafting a bailout that would curbed short-selling, guaranteed money-market mututal funds and mop up toxic mortgage debt.

Still, Morgan Stanley may find its way into the arms of partners as it continues to hold talks with a number of suitors — just at a less frantic pace.

The U.S. Securities and Exchange Commission has proposed about a dozen different restrictions on short sellers in the past few days, including an outright ban for financial stocks, but it hasn’t replaced the primary restriction on short sellers that was in place for most of the century.

The “uptick rule” or “tick test” required short sellers to sell at a price above the last price paid for a stock, or at the price of the stock’s last trade if it was higher than the previous price. The rule had been in effect since 1938, but the SEC removed the rule last year, on July 6, 2007, after saying it was “obsolete.” 

The SEC studied its removal, running a pilot program on 1,000 stocks starting in May 2005 through April 2006, a year when the bull market was just getting going and the Standard & Poor’s 500 index rose about 13 percent on its way to record highs.  Now that the S&P is down more than 14 percent since the beginning of this year,  getting rid of the rule has been blamed for increased volatility, and calls for its return could get louder as the process of market re-regulation gathers pace.

“The SEC did one of the dumb things that has been done to hurt this market, doing away with the uptick rule,” said Don Hodges, president of Hodges Capital Management.  

The uptick rule was removed just as subprime mortgages started their meltdown in August last year, which would have been a great time for investors to get short. They did, and short interest has risen to record highs this year.  

So the remaining question then  is, did the uptick rule really do anything? Check out this chart of nonblock money flow for listed U.S. stocks.

It shows stocks purchased at higher prices (upticks) versus stocks purchased at lower prices (downticks)  for the last two years. That big switch in the middle toward downticks hit around July 6, 2007.

These new short selling restrictions are much more complicated, and haven’t been studied. Maybe it would have been just as easy for the SEC to bring back the uptick rule.

-By Emily Chasan and Mark McSherry

Wall Street's cheering the Paulson Plan - a multi-billion-dollar taxpayer-funded effort to contain the credit market crisis. But a backdraft is underway in the blogosphere. Strategist-blogger Barry Ritholtz lays it out here in The Big Picture:

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists.

Comments rolling into Calculated Risk are uniformly negative, with the two presidential candidates coming in for some scorn for supporting the asset relief plan.

A temporary ban on short-selling from the SEC is drawing some arrows as well from Zac Bissonnette in BloggingStocks:

It's clear why the SEC is now banning it: this isn't about leveling the playing field or making the market more fair or efficient. This about the SEC using its power to manipulate the market upward.

Some close to the Street were critical of the ramifications too. "Wall Street has discovered a great business where the upside is potentially unlimited, but the downside is ultimately put on the taxpayers' tab," Cary Leahey, economist and managing director of Decision Economics told Reuters.