Daily Briefing » Cnn Money

Last month’s federal backstop of Citi (C) attracted some catcalls for letting the struggling bank’s management and shareholders off easy. But to former AIG (AIG) chief Hank Greenberg — a persistent critic of the tougher terms the government has enforced in its rescue of the teetering insurer — the Citi deal is a paragon.

Greenberg, whose investment portfolios have been devastated by the plunge of AIG’s stock, writes in an op-ed piece in The Wall Street Journal Tuesday that the Citi deal points the way toward a further loosening of terms on AIG. The Fed saved AIG from bankruptcy in September with an $85 billion emergency loan. But the insurer, facing huge cash outflows on its securities lending and credit default swap businesses, has had to get more money and is now in the hole to taxpayers to the tune of as much as $150 billion.

In expanding the amount of money available to AIG, the government last month reduced the rates it was charging the company and extended the loan repayment period. Those sweetened terms should make it easier for AIG to pay back government loans as it seeks to sell businesses to raise cash.

But Greenberg, who has been complaining about the terms of the AIG rescue since it happened, says that’s not enough. Now he wants the government to guarantee payments to the counterparties on the credit default swaps AIG wrote, just as it is guaranteeing most of the value of a $306 billion book of toxic assets at Citi.

Greenberg isn’t just thinking of himself as the biggest non-government AIG shareholder here, mind you. Backing AIG’s swap book, he said, would “allow a large portion of the previously drawn capital from the federal credit facility to be repaid and redeployed elsewhere in the financial system with no loss to the American taxpayer.”

But while guaranteeing the swap book may indeed be a more elegant solution for AIG than the current arrangement, Greenberg is apt to get carried away in his praise for the Citi deal. “The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers,” he wrote. This is a strange sentiment coming just two weeks after Citi said it would cut 53,000 jobs.

Looks like Fannie Mae (FNM) is headed for a reverse stock split. The Washington-based mortgage lender said Wednesday that it told the New York Stock Exchange it intends to push its share price back above $1 for 30 straight days between now and May in a bid to avoid being delisted from the NYSE. Fannie said it’s working with its regulator, the Federal Housing Finance Agency, “to determine the specific action or actions that Fannie Mae will take to cure the deficiency.”

But with taxpayers owning almost 80% of the company as a result of a federal takeover in September, the most likely option for the company to boost its stock price is to do a reverse split, as Fannie notes in its press release. The company, whose shares recently fetched 74 cents after trading earlier this year as high as $40, says it “expects to determine the actual number of shares that will produce one share of common stock as a result of any reverse stock split based on both the market price of Fannie Mae’s common stock prior to announcement of the split and additional input from FHFA and Treasury.”

Reverse splits were once the province of companies you’d never heard of. But in recent years a number of high-profile outfits that fell on hard times — including a predecessor company to AT&T (T) and computer giant Sun Microsystems (JAVA) — have moved to prop up their share prices through reverse splits. Considering the news in the economy of late, Fannie surely won’t be the last big-name company to head down the reverse-split road.

By Katie Benner

As the founder of Tremont Capital Management, Sandra Manzke has been in the hedge fund business for more than two decades. So when a veteran like her calls for hedge fund investors to unite and protect themselves against “egregious hedge fund managers,” you know there’s been a tectonic shift in the industry.

In an open letter to investors posted on the site of her current firm, MAXAM Capital Management, Manzke says she is, “appalled and disgusted by the activities” of many managers who are lining their pockets while damaging the industry’s reputation.

Manzke, who made her first investment when there were only 68 hedge funds, called for the formation of a “Hedge Fund Investors United Forum” that could be influential enough to curb rapacious fund managers. “As a group we can influence the future of the industry. We can start to define neutrally beneficial terms, not punitive investor terms… We need to get hedge fund managers to work for their investors and not for their personal gain.”

Chief among Manzke’s gripes about hedge fund practices: suspending redemptions, thereby, prohibiting investors from recouping their money even as losses mount; and charging outrageous fees.

What’s more, writes Manzke, some managers are attempting to get their money out ahead of investors, trying to eliminate performance hurdles, asking investors to increase fees to pay for fund expenses, receiving fees on liquidating funds, receiving fees on illiquid securities, and inaccurately pricing the value of their assets.

Manzke is not alone in her criticism of the hedge fund world. Congress is currently trying to find a way to regulate the industry, and the SEC has made several failed attempts to reign in hedge fund activities. “2008 is certainly a poster child for the need for better regulation,” writes Manzke.

“If we want to survive, we have to restore confidence and reshape the industry,” she continues. “I am not saying everyone out there is a bad apple, but there are too many bad apples for my taste and it only takes a few to bring the industry to its knees.”

By Katie Benner

Silda Wall Spitzer, a onetime lawyer and the wife of former New York governor Eliot Spitzer, has taken a job with hedge fund Metropolitan Capital Advisors, a $400 million fund founded by CNBC “Fast Money” contributor Karen Finerman.

An employee who answered the phone at Metropolitan confirmed that Spitzer, 50, is working for the firm, but declined to give specifics about her position or start date. New York magazine reports that Spitzer will help recruit new investors while still working on behalf of her charity, Children for Children.

Silda Wall Spitzer has worked as a corporate lawyer at Skadden Arps and an in-house attorney at Chase. Her husband served as New York’s attorney general and governor. As the state’s top lawyer, he was known for his crusade against market-timing hedge funds. He stepped down amid a sex scandal earlier this year after serving 14 months as governor.

Finerman’s husband Lawrence Golub is one of Eliot Spitzer’s longtime friends and political contributors.

by Katie Benner

Amid massive layoffs and losses, Citigroup (C) is also getting hammered by hedge fund declines, according to the Financial Times.

The FT says that Citi is liquidating its Corporate Special Opportunities fund, which invested mainly in debt that backed European private equity deals.

The fund was reportedly down 53% in October and has a net asset value of about $58 million and debt of about $880 million. At its peak, CSO managed about $4.2 billion. Citi tried to save the fund by supplying $450 million in credit lines and equity infusions of about $320 million. According to the newspaper, Citi told investors last month that CSO’s performance was “impacted by the fund’s leverage” after a deterioration in market conditions that “has been unprecedented and overwhelming.”

Earlier in the week, the FT reported that Citi is also unwinding a fixed-income hedge fund called Falcon. The fund had $10 billion under management at its peak, and the newspaper says that investors are likely to receive no more than 45 cents on the dollar.

People familiar with the matter told the FT that had Citi not injected a $250 million subsidy into the fund, investors might have received only half of that amount. Citi has not yet returned calls to Fortune seeking comment.

This is not the first-high profile setback for Citi’s hedge fund division. The FT reports that client assets in CAI, which houses the hedge fund division, fell 19 percent this year, from $48.7 billion at the end of 2007 to $39.4 billion at the end of September. CAI also manages $9.9 billion of Citi’s own capital.

In June, Citi shuttered Old Lane, the hedge fund founded by Citi’s chief executive Vikram Pandit. Old Lane blew up just about a year after Citi bought the fund for $800 million in a move to bring Pandit into the fold.

Lowe’s (LOW) is the latest company to warn that a sharp decline in consumer spending this fall will hammer holiday-season profits. The Mooresville, N.C.,  home improvement retailer beat Wall Street’s expectations for the third quarter, making $488 million, or 33 cents a share, for the quarter ended Oct. 31, down from the year-ago $643 million, or 44 cents a share. Analysts surveyed by Thomson Financial were looking for a 28-cent profit.

But if Lowe’s numbers for the third quarter were solid, the fourth quarter is looking weak. The company said it expects to make 8 to 16 cents a share for the quarter, below the 18-cent Wall Street estimate. Lowe’s expects sales in established stores to fall between 5% and 10% from a year ago during the quarter. In explaining the bleak outlook, CEO Robert Niblock echoed the likes of retailer Best Buy (BBY) and homebuilder Toll Brothers (TOL) in pointing to a steep pullback by U.S. consumers.

“While falling energy prices and initial signs of stabilization in housing turnover should aid the consumer,” Niblock said, “we saw a decline in sales trends in the last week of October that continued into November as the overall economic outlook deteriorated.”

While his words aren’t as strong as those used by Best Buy, which warned last week in cutting its full-year earnings guidance that “rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen,” the sentiment wasn’t lost on investors, who sent Lowe’s shares down 4% in premarket trading Monday.

Assured Guaranty (AGO) was a rare financial sector gainer Friday after the bond insurer scored what it calls a bargain deal to take over a big rival. Shares in Assured rose 15% after the company agreed to pay $722 million to take over Financial Security Assurance.

Under the cash-and-stock deal, Assured — the financial guarantor backed by billionaire vulture investor Wilbur Ross – will more than double the size of its financial guarantee business, while paying less than half of FSA’s net worth, going by one measure.

Assured Guaranty managing director Sabra Purtill called the deal a “once-in-a-lifetime opportunity” to benefit from the fearful credit markets and the financial distress of FSA parent Dexia. The governments of France, Belgium and Luxembourg poured billions of dollars into Dexia in September to prevent its collapse — a move that prompted Dexia to seek buyers for FSA, just eight years after it bought the U.S. property for $2.6 billion.

The purchase will give Assured Guaranty access to a strong earnings stream, says Purtill, at a time when credit market problems have led to a sharp decline in new business being written by financial guarantors. Assured Guaranty last week posted a $63 million third-quarter loss, as new business in the financial guaranty segment dropped 38% in gross written premium terms.

What’s more, Assured won’t be on the hook for losses tied to FSA’s troubled financial products segment, which guaranteed billions of dollars worth of investment contracts backed by mortgage securities whose value has plunged. Those losses will be covered in part by FSA’s parent Dexia and by the European governments now backing Dexia.

The deal is scheduled to close in the first quarter, assuming that rating agencies don’t conclude that the deal could hurt the companies’ credit ratings. S&P and Moody’s sent shares of Assured and Dexia plunging in July when it put Assured and FSA on watch for a possible downgrade. The third rating agency, Fitch, said Friday that doesn’t expect the deal to cause it to cut its ratings on FSA or Assured.

Even if Moody’s does follow through with the one-notch downgrade implied in July’s ratings watch, Assured’s purchase of FSA could still go through, Purtill says, assuming Moody’s doesn’t say anything unfavorable about the deal itself. “There’s an option for both parties” to terminate the deal in the event the ratings agencies take issue with it, she said. “But either side could waive it.”

Genworth Financial (GNW) has bought itself some time. The Richmond, Va., insurer said Thursday afternoon it had borrowed $930 million from JPMorgan Chase under two revolving credit facilities to pay down debt coming due next year. The move relieves worries that Genworth will run short of cash following this fall’s plunge in the decline of its investment portfolio.

“Accessing the credit facility to position us in retiring our 2009 debt maturities is an important step to navigate today’s difficult capital market conditions,” said CEO Michael D. Fraizer. “Genworth remains focused on enhancing capital flexibility through reinsurance and other strategic actions and positioning the company effectively while we serve our policyholders and distributors every day.”

Last week, Genworth posted a quarterly loss, suspended its dividend and said it would consider asset sales to raise cash. Genworth shares, which have dropped 90% in just two months, plunged below $1 apiece earlier this week after a ratings downgrade locked the former General Electric (GE) unit out of the market for short-term borrowing via commercial paper. The stock rose 50% in late afternoon trading to $1.50.

In drawing down more than half of its $1.7 billion in bank lines, Genworth joins other companies that lack the top credit rating needed to sell commercial paper into a market now shored up by the government. The bank-line drawdowns add yet another twist to the feds’ struggle to get loans flowing again to consumers and small businesses, with loans to borrowers that can’t get funds in the market adding to the banks’ capital needs.

Another bank is saying it doesn’t need the government’s help. Sierra Bancorp (BSRR), the holding company for a small California bank with $1.3 billion in assets, said Thursday it won’t seek funds from the Treasury’s capital purchase program. The company, which runs the Bank of the Sierra, said it made the decision based on its strong capital position, the cost of the government assistance and the availability of private-sector capital-raising alternatives.

“In addition to raising capital ratios to inflated levels, the acceptance of capital from the Treasury would place restrictions on the company’s ability to declare dividends and repurchase stock,” Sierra Bancorp said in a press release Thursday. “Furthermore, the Treasury’s capital purchase would be in the form of senior preferred stock that carries a mandatory dividend payment of 5% (close to 8% on a pre-tax equivalent basis), increasing to 9% (close to 14% pre-tax equivalent) after five years. This has been described as ‘cheap capital’ if needed, but in reality equates to expensive debt if it cannot be quickly utilized.”

Of course, very few people have been sitting around wondering what tack Sierra Bancorp might take with regard to the Treasury’s Troubled Asset Relief Program. But in saying it won’t participate, Sierra joins a brief list of banks noted last week by CNNMoney’s Paul La Monica. The firm also lays out a case for not taking the taxpayer funds - one that might be adopted by any number of bigger, healthy banks, such as Hudson City Bancorp (HCBK).

The Sierra comments come a day ahead of the deadline for eligible publicly traded companies to apply for funds. Among the latest firms that are going out of their way to make themselves eligible are CIT Group (CIT), the troubled middle-market lender that said earlier Thursday it will apply to convert itself into a bank so as to qualify for TARP funds, and American Express (AXP), which pulled off that trick earlier this week. Not that getting the TARP treatment solves all your problems: AmEx shares, down 5% in trading Thursday, have lost a quarter of their value since the Fed approval came through Monday night.

Another day, another tough break for Lehman Brothers chief Dick Fuld. Fuld and his wife Kathy sold 16 drawingsat a contemporary art auction Wednesday for $13.5 million, Bloomberg reports. While that’s a nice chunk of change, it’s 10% below the low estimate made by Christies, which conducted the auction in New York.

Like so many things, art prices have been hit hard by this fall’s financial market meltdown, which was set off in part by September’s collapse of Lehman. Still, the Fulds will make a good profit on Wednesday’s sale. They got $2.2 million for Arshile Gorky’s Study for Agony 1, for instance. That is below the $2.8 million high estimate but six times the $370,000 they paid in 1996, Bloomberg reports.

Last week, Fuld set plans to leave Lehman by the end of the year, without any severance or bonus, though it seems clear that the Fulds aren’t in dire need of cash. Fuld made $22 million last year, according to the Associated Press, and Fortune’s Allan Sloan calculatedearlier this year that he had taken down $489 million in stock sale proceeds in his 14 years at the helm of what was the No. 4 U.S. brokerage firm. Bloomberg, meanwhile, reports that the Fulds are holding onto most of their collection while pruning it of some older works.

Treasury Secretary Henry Paulson’s decision not to relieve banks of their troubled mortgage-related assets looks like bad news for Citi (C). Shares in the bank fell 8% in trading Wednesday to $9 and change - marking the first time they have broken below $10 in a dozen years. The decline came on the latest down day for stocks, with the Dow Jones Industrial Average off 3%, and after Paulson said in a speech in Washington Wednesday morning that the government wouldn’t buy back the illiquid mortgage-related securities whose planned purchase was the centerpiece of the original Troubled Asset Recovery Program.

“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,” Paulson said Wednesday. “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

Paulson pledged to pursue other strategies to loosen up the markets for illiquid assets, though it’s not clear any of them would be as much of a boon to some banks that the original TARP might have been. An analyst wrote in September, after Paulson first proposed the TARP, that Citi could have been in line to sell as much as $79 billion in troubled assets to the government.

Since then, the bank has gotten $25 billion in new capital via sales of preferred stock in the TARP Capital Purchase Plan, shoring up its balance sheet. But a deal that would have strengthened Citi by handing it the big U.S. deposit base of Wachovia (WB) fell through. So while the government has made it clear that the likes of Citi won’t be allowed to fail, it isn’t yet clear what path the bank might follow that would clearly allow it to thrive.

The decision not to use taxpayer funds on mortgage-backed securities may disappoint some advocates of price discovery. But there are those who believe removing the government from the mortgage-backed securities market altogether is likely to be a good thing.

“Distressed debt funds and others that had been investing in mortgage loans and mortgage-backed securities have been on the sidelines since the TARP was announced, waiting to see what the Treasury was going to do,” says Edward Gainor, a partner at the law firm McKee Nelson who focuses on the securitization of financial assets. “Now that it’s clear that the TARP won’t be a significant player in that market, we should see an increase in purchases of distressed mortgage assets.”

If that’s so, the banks could soon be making progress on clearing their balance sheets - though perhaps not, as Fox-Pitt Kelton analyst David Trone wrote in September, without the accompanying headache of additional writedowns on assets sold below their carrying value.

Toll Brothers (TOL) is sounding another alarm on the economy. The Horsham, Pa., luxury homebuilder posted a 41% decline in revenue for the fourth quarter ended last month. Net signed contracts dropped 27%  from a year ago, as the bottom fell out of the market in October.

CEO Robert Toll said that as late as September, the company was on track to post a flat quarter in terms of contract signings. But that trend, which Toll had pointed to in its third-quarter earnings call as an early and modest sign of stability after a three year housing slump was “upended by the past month’s financial crisis,” the company said. As a result, Toll said it won’t offer any financial guidance for 2009.

Now, with Washington handing out multibillion-dollar goodies to the finance industry, the company’s focus is turning to how to break the cycle of slowing economic growth and falling house prices. Toll is among those who want to see the feds take more action to shore up the housing market.

“Congress has allocated hundreds of billions of dollars to reset mortgages, help people who are in foreclosure, and protect those who have been the victims of rapacious lending practices,” Toll said in Tuesday’s press release. “We believe all of these goals are very worthy.

“However, we believe that, if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers’ money will have been wasted,” Toll added. “We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes. We believe these initiatives would offer the greatest benefit for the taxpayer’s dollar.”

Of course, as the National Association of Homebuilders will be sure to tell you, the Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for some people buying their first houses between April 9, 2008, and July 1, 2009. But the call for lower mortgage rates and fees tracks with a proposal that some observers are making about dramatically expanding the role of Fannie Mae and Freddie Mac in providing low-cost financing to first-time homebuyers. The question now is what approaches the new administration might embrace.

What should President-elect Barack Obama’s first priority be as he considers the state of the economy?

Much attention has attached to the question of who will serve as Obama’s Treasury secretary. Fortune’s Andy Serwer says Larry Summers, a former Treasury chief now with Harvard, is the leading candidate, with the support of his former boss, Citi (C) senior counselor Robert Rubin. A Summers appointment would come as no surprise, though there are those who note that Summers and Rubin were among the officials who oversaw the dismantling of the financial regulatory structure that began under former President Bill Clinton — a move that now looks less than prescient, to say the least.

But some people say the Treasury secretary question pales in comparison to the need to unlock the credit markets, which, despite some recent thawing, remain largely frozen. Jeff Miller, CEO of NewArc Investments, writes that the biggest threat to the economy stems from the lack of confidence in financial institutions, a mistrust he attributes to the presumption that big banks’ mortgage-related holdings are worthless.

While that may overstate the point, it’s become clear during the markets’ shellacking over the past two days that questions about financial companies’ health are far from settled. Citi has dropped 19% and Bank of America (BAC) 17% since Tuesday’s election-day rally. The only way out of the death spiral, Miller says, is to find a way to match the sellers of troubled assets with private-sector buyers.

“We hope that you will use your power to create a price discovery mechanism where we can find stability in financial assets,” Miller wrote in a blog post styled on a memo to the president-elect. “There is no single action that you can take before Inauguration Day that will have more impact.”

Trying to set prices for debt instruments that no one wants to buy except at a steep discount takes us back to the earliest versions of the Troubled Asset Recovery Plan, proposed in September by Treasury Secretary Hank Paulson. The Treasury never said exactly how such price discovery would work, beyond pointing to the possible use of reverse auctions. In the rush to shore up the financial system, though, the focus soon turned to pouring money into banks in a bid to rebuild their capital and, hopefully, get them lending again.

Despite the detour, a price-discovery effort is eminently workable, Finacorp Securities chief economist David Merkel argues. He sketches out one possible scenario in a post on his Aleph Blog, though he cautions that even a well-designed reverse auction might reveal some casualties.

“Finding the market clearing price will make the markets start moving again,” he wrote, “but it also might prove that some financial institutions are inverted (negative net worth), if not insolvent (can’t get enough cash to pay all immediate claims).”

Which brings us back to the too-big-to-fail problem that Paulson, Fed chief Ben Bernanke and other policymakers have been struggling with ever since Bear Stearns went belly-up in March. Despite government actions like last month’s TARP capital purchase plan, which showered $125 billion on nine big financial institutions, there’s still no game plan in place for what to do when a big bank’s poor health is exposed and possible buyers — as in Wells Fargo’s (WFC) purchase of Wachovia (WB) — aren’t available.

Merkel says one answer is to set up an expedited Chapter 11 bankruptcy proceeding that would allow bad debts to be renegotiated or reduced. Another advocate of the so-called cramdown approach is University of Chicago Professor Luigi Zingales, who wrote in September that the government should force the creditors of troubled institutions to swap their debt for equity, or forgive some of their debt claims.

Calling such an arrangement a “lesser evil” than the initial Paulson approach, which proposed government purchases of troubled assets, Zingales says cramdowns make sense for taxpayers, though they won’t be popular with the well-connected investor class.

“It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain,” he wrote. “Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition.”

But while forced restructurings may be unpopular with creditors, Zingales says they would be good for the economy and even, believe it or not, for investors. He notes that stock and bond prices actually rose after the government instituted such a plan during the Great Depression.

“For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system,” he wrote. “The time has come to save capitalism from the capitalists.”

Wells Fargo (WFC) said after the market closed Wednesday that it plans to raise $10 billion by selling common stock to the public. The move comes just a week after the San Francisco bank got $25 billion from the government in a sale of preferred stock under the Treasury’s capital purchase program. Wells said last month that it would raise as much as $20 billion, primarily through sales of common shares, to finance its acquisition of troubled Charlotte bank Wachovia (WB).

“The combination of the market capital and the capital investment from the government will enable us to finance the Wachovia acquisition, to continue to build our franchise and gain market share as we’ve done throughout the credit crunch and to maintain one of the strongest balance sheets and highest capital ratios among U.S. financial services companies,” Wells said last week.

But if Wells’ stock sale has been well telegraphed, the timing could have been better. The announcement comes at the end of a day that saw the Dow Jones Industrial Average plunge almost 500 points, led by the latest rush out of the financial sector.

Among the biggest losers were big banks such as Citi (C), which dropped 14%, and Bank of America (BAC), which lost 12%. One factor in the selloff may have been the sobering comments out of bond insurers Ambac (ABK) and MBIA (MBI), which raised their projected mortgage losses after saying earlier this year that they believed trends were starting to stabilize. Wells Fargo dropped 3% in late trading Wednesday on top of a 9% selloff in regular action - meaning the company will have to sell a few more shares tonight to raise the new money than it would have yesterday.

Souring credit markets and tumbling house prices have taken another chunk out of bond insurers Ambac (ABK) and MBIA (MBI). Shares in the companies plunged 25% Wednesday after they posted steep third-quarter losses, as the value of their mortgage holdings fell again following a quarter of stability.

Ambac lost $2.4 billion and MBIA $806 million for the quarter ended Sept. 30, as the companies increased their projected losses on second-lien mortgage securities holdings. A slowdown in the deterioration of those positions in the second quarter had been heralded by bulls on the stock as a hopeful sign. But “after initial signs of stabilization,” Ambac said Wednesday, “recent second lien product performance has disappointed.”

The news comes as the companies try to reduce their exposure to big losses that may materialize as house prices fall and the economy slows. “As we’ve discussed previously, our near-term objectives include deleveraging our balance sheet and maximizing our liquidity position in support of our long-term business transformation,” MBIA chief Jay Brown said. “We continued to make progress toward those ends in the third quarter, as our balance sheet grew stronger through debt repurchases and amortization of our insurance portfolio.”

One oddity is that while MBIA spent $54 million buying back its debt at discounted prices during the third quarter, it spent a larger sum - $90 million - buying back shares at levels 40% above Wednesday’s market level. Supporters of Jay Brown’s turnaround strategy might note that the company’s favored metric, analytic adjusted book value - a non-GAAP measure of the company’s net worth that excludes some mark-to-market losses and recognizes some unearned premiums, among other things - puts MBIA’s worth above $25 a share, and even its GAAP book value is $11.37 a share, in line with the amount MBIA paid during the quarter.

But with projected losses rising again and MBIA stock fetching $8 in trading Wednesday, investors in the bond insurers are reminded once again that the road to recovery - even if it includes government support - won’t be smooth.

Tuesday’s rally has reduced the spreads on some big pending mergers to levels not seen since early last month. A 4% rise in shares of Merrill Lynch (MER) means that the brokerage firm is trading just 5% below the price shareholders can expect to get when acquirer Bank of America (BAC) completes the $50 billion deal. That’s the narrowest spread since Oct. 8, the day before Merrill shares lost a quarter of their value in a 679-point rout of the Dow Jones Industrial Average. For most of the six weeks since BofA agreed to buy Merrill for 0.8595 BofA share, the spread between the value of the offer and the price of Merrill stock has hovered around 10%.

Another deal whose prospects are looking better with the rally is InBev’s $52 billion acquisition of Anheuser-Busch (BUD), the St. Louis-based brewer of Budweiser. Shares in Anheuser rose 2% in afternoon action Tuesday to $64.63 after earlier trading as high as $64.95. That’s their highest level since Oct. 3, which was in the midst of the market’s long early October plunge. Shares in Anheuser are now trading at a 8% discount to the $70-a-share all-cash offer from InBev, compared with a 19% spread on Oct. 24, the day before the Dow hit its recent closing low of 8175. Anheuser shareholders are slated to vote on the deal Nov. 12.

One other beneficiary of Tuesday’s deleveraging pause — along with a rise in stocks, Tuesday brought a selloff in the dollar which, along with the yen, had been a primary beneficiary as leveraged investors moved to raise cash — was Constellation Energy (CEG). The Baltimore-based utility operator and energy merchant agreed in September to sell itself to Warren Buffett’s Berkshire Hathaway (BRKA) at a steep discount, to avoid a cash crunch. Constellation shares rose 3% to $24.18, putting them 9% below the value of Berkshire’s $26.50-a-share agreement and in line with the values they have generally fetched since one rival suitor, Electricite de France, bowed out of the running.

Another setback for Constellation Energy (CEG). The Baltimore-based energy merchant and utility operator saw its shares drop 3% Monday after the latest twists in Constellation’s attempt to extricate itself from a credit squeeze via a sale to Warren Buffett’s Berkshire Hathaway (BRKA).

Berkshire agreed in September to buy Constellation for $4.7 billion, which was just a fraction of the energy company’s price this summer, before the credit squeeze left Constellation struggling to raise money for its capital-intensive trading business. As part of the deal, which is expected to close in the first half of 2009, Berkshire agreed to make a $1 billion preferred-stock investment in Constellation.

But while the deal seems to be on track – Berkshire’s MidAmerican unit said Monday that the companies had gotten regulatory clearance to do the merger – the financing questions surrounding Constellation won’t go away. The company said late Friday that a $2 billion credit line it had been planning on is on hold, and that the banks offering the cash — UBS (UBS) and Royal Bank of Scotland (RBS) – are now expected to offer between $1 billion and $1.25 billion when that transaction closes later this month.

Constellation, which is raising the money as part of a plan to “increase available liquidity and reduce risk in its commodities businesses,” said it is working with MidAmerican and others to raise as much as $750 million to go on top of the reduced credit line. “Despite the very challenging credit environment,” said CEO Mayo Shattuck, “we are making significant progress toward meeting our liquidity needs.”

American Express (AXP) is the latest big employer to swing the ax. The New York-based credit card company set plans Thursday to cut 7,000 jobs, or more than 10% of its staff, in a move that AmEx says will help it save $1.8 billion next year. In addition to the job cuts, which will be centered in what AmEx terms “positions that do not interact directly with customers,” the company is cutting management salaries and instituting a hiring freeze.

The move comes a week after American Express posted a 24% drop in third-quarter earnings, as U.S. cardmembers reduced their spending. The cuts at AmEx come amid a wave of cutbacks by big companies ranging from Goldman Sachs (GS) to Whirlpool (WHR) and Yahoo (YHOO). The government said Thursday that initial jobless claims were flat with a week ago, but up 40% from year-earlier levels.

“We’ve been engaged for the past few months in an intensive, companywide review of priorities and staffing levels,” AmEx chief Kenneth I. Chenault said. “The reengineering program we announced today will help us to manage through one of the most challenging economic environments we’ve seen in many decades.”

What a difference a government takeover can make. Fannie Mae (FNM) said Wednesday it plans to write off the value of an asset that was at the center of accounting questions before Treasury took Fannie and its government-sponsored sibling Freddie Mac (FRE) over in September.

Fannie said Wednesday it “has determined to take a valuation allowance against its deferred tax asset,” which amounted to $20.6 billion at June 30, the latest date information is available. The deferred tax asset reflects losses the company accumulated for use in offsetting future profits. There’s nothing inherently insidious about deferred tax assets, but obviously they’re only of use when a company expects to be profitable soon — something no one is likely to say about Fannie, which lost $4.5 billion in the first half of this year as it added to its loan loss reserves.

Critics of Fannie frequently complained in the run-up to September’s takeover that the companies were overstating their capital by including the full value of the deferred tax assets in capital calculations, rather than the much smaller amount permitted by bank regulators. That was an important claim because, even accepting the companies’ accounting, Fannie and Freddie were operating on a perilously thin capital cushion in an environment of falling house prices.

Yet as recently as August, when Fannie held its last earnings conference call as a shareholder-controlled company, execs were still insisting it was appropriate to carry deferred tax assets and count them in full as capital.

“What we do is we make an assessment on the recoverability based on the taxable income the company generates,” then-finance chief Steve Swad said. “And just remember that our taxable income is higher than our book income because there’s no reserve building expense. Based on that, we think it’s sufficient to recover the asset.”

Since then, however, Swad has departed in a finance department shakeup, to be followed a week later by CEO Daniel Mudd and other top execs. With the government in control of Fannie and the executive suite having been cleared, it seems there is no reason to make any hard-to-figure claims about Fannie’s income in the next few quarters.

By David Whitford, editor at large

You’ve been hearing lot of talk lately about the coming “nuclear renaissance,” some of it from me (See “The power generation gap“). Last year I drove 7,000 zig-zaggy miles – from the Seabrook nuclear power plant on the New Hampshire coast to the Idaho National Laboratory in a desolate valley in the southeastern part of the state - to examine firsthand the prospects for a nuclear power revival in the United States.

But so far, frankly, there hasn’t been much action to report. The Nuclear Energy Institute, for example, a pro-nuke trade group, says 17 utilities and consortiums are “pursuing” licenses for 30 new nuclear plants in the U.S. That’s potentially meaningful, given the fact that there hasn’t been a new nuclear plant open in the United States since 1996, and construction on that one began in 1973.

But it’s a long way from filing papers to putting shovels in the ground, much less flipping the switch and putting power on the lines. “None of these utilities have committed to building” says Darren Gale, VP for Babcock & Wilcox’s nuclear power generation group. “All you hear about is licensing efforts. Utilities are not putting their necks out yet as far as going down the path of full construction.”

That said, there is some recent movement to report. French nuclear power giant AREVA and Northrup Grumman Shipbuilding (NOC) jointly announced Thursday afternoon plans to build a $360 million plant in Newport News, Va., to supply large-scale components for the U.S. nuclear power industry. The announcement follows one earlier this summer by The Shaw Group and Westinghouse of their plans to build a nuclear components plant in Louisiana. Both are important steps toward what AREVA chief executive Anne Lauvergeon, in an exclusive interview with Fortune before the announcement, described as “reviving the capacity of the nuclear industry in the U.S.”

Lauvergeon means the capacity to build new nuclear power plants, which is perhaps the biggest roadblock to the industry’s vision of dramatically increasing nuclear’s share of electricity generation in the United States, currently stalled at 20%. Set aside the safety fears, political opposition, regulatory hurdles and the seemingly irresolvable quandary of how to dispose of the waste and you’re still left with the nagging question of who’s going to build all these new plants.

We used to do it all here. Today there’s just one plant in the world that’s producing the massive steel forgings that form the core of nuclear reactors, in Japan. And until these proposed new plants come online in Virginia and Louisiana, there’s still only one plant left in America — a Babcock & Wilcox facility in Mount Vernon, Ind. — that has the coveted “N” stamp required for large-scale nuclear manufacturing.

One more factor to keep in mind: The potential impact of the global economic crisis on construction plans going forward. Lauvergeon says she’s not worried about that. AREVA has a five-year backlog, she says, and is still forecasting heavy demand for new plant construction in developing countries like China and India.

Gale of Babcock & Wilcox, meanwhile, sees a possible boost to the industry if a new administration in Washington were to initiate large-scale public works projects as a way of stimulating the economy. “My opinion,” said Gale, “is any country would be well served in a time like this to work on infrastructure. That’s what you should do with your money. It creates jobs and focuses on things you have to have.” (For complete coverage of the U.S. nuclear power industry and its revival, click here.)