Investment Banking

Although the formal unveiling is still a couple of weeks away, the broad outlines of President Obama's long-delayed plan for reviving the nation's financial system are coming clear: an ambitious but untested attempt to partner up private capital with government funds while limiting the risk to taxpayers.

Investment banker Steven Rattner came to Washington in February to help the Obama administration bail out General Motors Corp. and Chrysler -- and maybe even find a larger role in government for himself. But any larger ambitions are now clouded by a pay-for-play scandal that links the New York state pension fund, a low-budget movie called "Chooch" and Rattner's former private-equity firm. There are no allegations of wrongdoing by Rattner or his former company, Quadrangle Group.

The Supreme Court on Tuesday sharply limited the reach of securities fraud lawsuits by shielding bankers, accountants and others from being held liable for participating in a scheme to inflate a company's stock. The 5-3 ruling came in a case involving Charter Communications and Scientific Atlanta, but it has broader implications for securities litigation. It is a big win for Wall Street investment bankers accused of aiding other schemes such as those that brought down Enron and WorldCom.

It was a bad year to be an investor, but a great year to be a broker. Wall Street's five largest investment firms paid record amounts of compensation in 2007, despite the fact that three of the five firms posted quarterly losses as the result of souring investments in sub-prime mortgages. Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Bros. Holdings Inc. and Bear Stearns Cos. shelled out $65.6 billion in compensation and benefits last year, up about 8% from last year.

The battered global financial system looked a lot more fragile Friday as one of Wall Street's biggest investment houses was forced to get an emergency loan from the Federal Reserve, raising the specter of more giant securities firms laid low by the global credit crisis. Bear Stearns Cos. said its ability to finance its operations had "significantly deteriorated" in the preceding 24 hours, compelling it to borrow an undisclosed amount of money from the Fed.

Throughout Wall Street's history, major financial system upheavals often have culminated with the spectacular failure of a marquee name. That was the case in December 1994, when Orange County filed for bankruptcy protection after getting caught on the wrong side of a sharp jump in interest rates. In September 1998, the Federal Reserve helped arrange a bailout of the giant investment fund Long-Term Capital Management after it neared collapse from bad bets in wildly swinging markets.

The Federal Reserve took extraordinary steps Sunday to bolster investors' shaken confidence, opening a lending window to securities firms, slicing a key interest rate and backing with $30 billion in emergency funds the bargain-basement purchase of ailing Bear Stearns Cos. by rival JPMorgan Chase & Co.

The stock market's rebound from the depths stalled Monday as the price of oil climbed, offsetting optimism engendered by better-than-expected earnings at Bank of America. Although the market's major indexes showed modest losses Monday, the number of stocks advancing outpaced decliners by almost 2 to 1 on the New York Stock Exchange and by about 4 to 3 on Nasdaq.

Wall Street's most drastic upheaval in decades has become the opportunity of a lifetime for Ken Moelis. Although he has kept a relatively low public profile, Moelis is one of the most successful U.S. investment bankers of the last 20 years. He has been financial consigliere to some of the nation's wealthiest entrepreneurs, including Donald Trump, Steve Wynn, John Kluge and Ron Burkle.

Ken Moelis' model for his new investment bank is the so-called merchant bank. All investment banks provide financial advice to companies for a fee, but a merchant bank also has a pool of capital to invest in corporate deals -- for example, in the case of a company that's going private in a leveraged buyout led by management. Goldman, Sachs & Co. is a major player in the merchant-banking arena.