Bailout limbo takes a bite out of Russell

Small-cap stocks have sunk mid-session, as the market continues to await details of the proposed government bailout plan and the new banking landscape on Wall Street. 

At 12:38 p.m. ET, the Russell 2000 (NYSE:IWM) was down 19.09, or 2.53%, at 734.65.

Though when initially announced the bailout was cause for celebration on Wall Street, as traders wait for the details of the deal the bears have found their place again. The administration’s leaders on the bailout plan have been meeting with congressional leaders today, who support the plan. President Bush said that failure to act on the bill would have broad consequences beyond just the pain on Wall Street, but that he was confident the legislation would move forward. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are expected to brief Congress on the economy Wednesday.

“Last time I checked, there’s no provision in the U.S. constitution to turnover the country’s check book to one plan, one department, and one man,” BMO Capital’s Andy Busch said in an email. “This is a huge leap of faith and I suspect that leaders of Congress and the Presidential candidates will urge caution or act cautiously. This is the time for action, but not the time to essentially restructure the entire financial system of the country that has worked well up until we had 1% interest rates. There are other solutions and ideas that need to be considered. Remember, this is not an RTC type situation where the government already had the bad assets put to them via the FDIC and then had to figure out what to do. This is a takeover of choice.”

In the mean time the banking landscape continues to change on Wall Street. Investment banks Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) said Sunday that they will be converted into commercial banks effectively ending Wall Street’s legacy of independent investment banks. The move will create easier access to credit, will enable them to better organize their assets as well as shore up their leveraged and riskier businesses in light of the now dead short-term financing markets. Investment banks thrived off of short-term financing for the past five years. Now that the leverage is obsolete, the oxygen is gone and the banks have no choice but to change their ways or to cease to exist.  The new move; however, will also create greater oversight from the Federal Reserve.

“It will be interesting to see whether Goldman and Morgan continue in the top ranks of businesses we historically have associated with investment banking,” said Bill Wilhelm, equities professor at the University of Virginia’s undergraduate business school and co-author of the recent book Investment Banking: Institutions, Politics and Law. ...

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