I almost didn’t answer the phone when DealBreaker came calling. It was a Sunday afternoon and I was sitting in a bar somewhere in Brooklyn. The phone was sitting on the bar next to a pack of smokes and a pint of Six Point. A glass of whiskey was in my hand. The phone buzzed, shimmying on the bar a bit. The girl I was drinking with gave me that look girls give you when you consider answering your phone in the middle of a conversation with them. That’s probably why I answered it.

It was Elizabeth Spiers. She asked if I would be interested in writing for her new financial website. I wasn’t working at all in those days, unless you count pretending to freelance and writing pieces of a novel once a week as working. I told her yes. When did she want me to start? Monday. And so the next day I became an ink-stained wretch, reporting the follies and foibles of Wall Street.

We’ve come a long way. In those early days—two and half years ago—the excesses bred by wealth and entitlement provided fodder for my writing. There was this government sponsored mortgage company that should have been delisted but got the New York Stock Exchange to bend the rules for it. Some kids engaged in the zaniest insider trading scheme ever. Another kid made a video about himself, proclaiming “Impossible Is Nothing.” Steve Schwarzman threw himself a birthday party that would have made the Marie Antoinette blush. It was heady times but we knew, even then, that the end was coming.

Lately we’ve spent our time covering the collapse, the fall of the titans. Now Wall Street is busy shoring up its ruins, plotting the rebuild its empire. In the course of my two and a half years at DealBreaker I’ve watched the masters of the universe become welfare queens, tin cup in hand, begging for protection and subsidies from the government. Millionaires and billionaires who want taxpayers to rescue them from market processes. And it looks like we’re going to do it.

Today is my last day at DealBreaker. I leave you in the capable hands of Bess Levin, my writing companion for the past 130 weeks or so, while I move on to other forums. Equity Private and a special surprise writer will be around to help out. You’ve been the best readers a writer could hope for. Thank you for your tips, your comments and for reading. Thanks, really, for going along with me all this way.

For those of you still on Wall Street or wondering what to do next, I’ll offer a four pieces of advice. Remember that we’ll get through this mess we’re in, and we’ll have great stories to tell about it for the rest of our lives. Never work in a job that makes you miserable. Love your family, help your friends. Buy drinks for strangers.

There’s the closing bell. My work here is done.

Morgan Stanley’s prime brokerage has lost about ten percent of its hedge fund clients, Bloomberg is reporting . But you probably already knew that the hedgies were running for the exits.

It was a bit disturbing to hear John McCain blaming the greed of Wall Street and the lack of federal oversight for the our financial meltdown. But McCain’s performance yesterday on the Today show was truly a travesty. He attempts to voice the free-marketeer line that AIG shouldn’t be bailed out but winds up sounding like Miss Teen USA South Carolina talking about Iraq.

Our friend Rachel Sklar at the Huffington Post provides the transcript.

LAUER: So if we get to the point middle of the week as we heard in that report where AIG might have to file for bankruptcy, they’re on their own?

McCAIN: Well…quote, “on their own”…we have to - we cannot have the taxpayers bail out AIG or anybody else…this is something we’re gonna have to work through — there’s too much corruption, there’s too much access, we can fix it, I believe in America - we can have a 9/11 commission such as we had after 9/11, ‘cause this is a huge crisis and we can come up with fixes and we can make sure that every American has a safer future and that is to make them know that their bank deposits are safe and insured.

It’s hard to escape the feeling that free market ideas don’t stand a chance with this guy as the Republican leader.

Does McCain Understand The AIG Crisis? [Huffington Post]

Bear Stearns. Lehman Brothers. Merrill Lynch. Three of Wall Street’s venerable names failed to persuade the markets that they would survive as independent banks. Yesterday the last two of the independent titans of Wall Street came under fire.

Both Goldman Sachs and Morgan Stanley are were battered yesterday by the stock market. At its lowest point, Goldman was down 25 percent, with its stock trading below $100. Morgan Stanley was hit even harder, plunging 40 percent in intraday trading. By the end of the day, the question was which commercial bank would combine with Morgan Stanley, and whether Goldman might go private or also merge with a commercial bank.

Behind the scenes things were even worse. Hedge fund clients were in full flight from Morgan Stanley and Goldman Sachs, according to a person familiar with the matter. The larger commercial banks found themselves inundated with new clients for their prime brokerages. As many as twenty hedge funds approached one large commercial bank with a prime brokerage. It looked like a run on the banks might get started.

The process of watching an investment bank rapidly implode can be perplexing. Why should even a dramatic decline in its stock price force an investment bank out of business? Even if investors lost confidence in the investment bank, wouldn’t it still have a strong team in place that could continue serving its customers? As with Bear Stearns, Lehman and Merrill Lynch, however, the customers of Morgan Stanley and Goldman Sachs apparently began to pull their business while the share price faltered, according to our source. It looked as if the stage was being set for another run on the bank.

Scholars looking at the old-fashioned bank runs of the 1930s, when customers raced to withdraw their deposits from faltering banks, have come up with an explanation for bank runs that sheds light on what happened to Lehman Brothers last week. As it turns out, shareholders unknowingly provide an important service for a bank’s customers, providing outside oversight of a bank’s activities. In particular, scrutiny by sophisticated institutional shareholders can act as a check against abusive or overly risky activity. A sell-off by these shareholders signals two things: risk at the bank has increased and the shareholder oversight mechanism is no longer in place.

The customers of investment banks, like depositors at commercial banks, depend on shareholder scrutiny, and withdraw their business from the banks when a dropping stock price signals this has broken down. Yesterday, enough shares traded hands to replace nearly every third owner of Goldman Sachs and Merrill Lynch. It hadn’t reached the Lehman stage yet, where the volume over a few days amounted to every share of the companies stock. Still, customers watching could conclude that the shareholders who had been watching the shop had fled for the exits.

Until last week, many believed that Lehman couldn’t fall prey to a Bear Stearns style bank run because it had something Bear never had: access to the primary dealer lending facility, a special program that allows investment banks to borrow from the Federal Reserve’s emergency discount window. Opened after the collapse of Bear, the discount window should have guaranteed Lehman wouldn’t ever lack the funds it needed to run its business. But according to people familiar with the matter, Lehman’s customers last week started moving their funds from margin accounts, which Lehman could tap for liquidity, to segmented custodial accounts, where the money is out of Lehman’s reach. As the process played out, Lehman would quickly find itself grasping for funds. If customers and investors don’t regain confidence in Morgan and Goldman, the same process could well get underway.

Just as banks’ depositors occasionally make runs on banks despite the existence of deposit insurance, investment banking customers of Lehman began a bank run despite the emergency backstop. They may be preparing to do the same to Goldman and Morgan. In the end, the Fed’s backstop is no substitute for trust and scrutiny by the markets.

We knew that Morgan Stanley was in talks with a number of banks to discuss possible mergers. But until late tonight we only had one name: Wachovia. Now CNBC has dug up another name: Chinese bank Citic.

Morgan Stanley is in talks to possibly be acquired by Chinese bank Citic, sources in the U.S. and China have told CNBC.

No deal is certain at this time, however, and sources said that none was likely to be finalized Wednesday.

Morgan Stanley in Talks with Chinese Bank Citic [CNBC]

The homeless guy who hangs around the street outside of DealBreaker Global Headquarters asking for cigarettes suddenly has opinions about the global financial meltdown. As we handed him a cancer stick he decided to instruct us about how to keep our money safe.

“What you gotta do is take your money out the banks and you gotta put it into China. Get yourself some yen,” he said.

They don’t ring a bell at the bottom but this strikes us as something akin to the shoeshine boy with stock tips for Joe Kennedy.

“Nowadays we all know that cash rules everything around us. C.R.E.A.M. Get the money. Dollar, dollar bill y’all.” Don’t even try to short them. (Some of the audio is probably not safe for work but since work isn’t really safe for work these days, just go for it.)

You didn’t really think that the Fed’s balance sheet wouldn’t be hurt by lending $85 billion to AIG, pouring liquidity into the markets, opening new borrowing facilities, guaranteeing Bear Stearns obligations and taking junk collateral at inflated prices, did you? And surely you didn’t really buy all that nonsense that the Fed was spending it’s own money on these bailouts rather than taxpayer money. The government has wiped away all those illusions. It is borrowing money, and handing it to the Fed to shore up the balance sheet.

Direct from the Treasury Department’s press release.

The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules. Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.

We cannot say we’re shocked that the Federal Reserve and the Treasury swooped in to take over the American International Group US Department of Insurance. We began reporting that a takeover was under consideration shortly before two in the afternoon. But to say we expected this takeover is not to say we understand it.

We’re told that this was necessary because the failure of AIG posed a systemic threat to the financial system. This gives rise to a riddle, however. If the financial system was threatened, why wouldn’t the financial firms who were presumably staring into the abyss agree to build the bridge loan? Surely they would have had the most to lose from the collapse of AIG.

We know that the Federal Reserve and the Treasury Department worked hard to find a market based solution to AIG’s problems. Morgan Stanley was hired as an adviser. JP Morgan and Goldman Sachs were asked to organize a lending syndicate. Government officials attempted to signal that they would allow AIG to go the way of Lehman Brothers unless private funding for AIG was found. None of this worked.

It looks as if the heads of our banks and Wall Street firms called the bluff of their comrades in the government’s bank. Perhaps they never for a moment believed that the government would allow AIG to sink. Perhaps they knew that they could get New York’s public officials and foreign governments frightened enough to pressure the government to act.

Or maybe, just maybe, they understood that the dynamics of government are very different from the dynamics of business. Executives in private-sector banks (to the extent such things continue to exist) stand to make or gain an enormous amount of money when the institutions under their care profit. Incentive pay, options grants, restricted stock have somewhat aligned their interests with those of their shareholders and the profitability of their firms, reducing what the economists like to call “agency costs.”

No such incentive alignment has been undertaken with respect to taxpayers and government officials. If the money lent out to AIG is not paid back, Hank Paulson and Ben Bernanke will not suffer financially. If you ever wanted to see an agency cost roaring, the AIG takeover is your dream come true. What’s more, the deal allows government officials the rare thrill of feeling that they are not only very, very relevant, they are now the masters of the universe, the warrior kings of Wall Street.

From the perspective of, say, Jamie Dimon, it must have been obvious that the government would bail out AIG. Everything he knows about human behavior would have told him this. The bailout was overdetermined. If he was surprised, it was no doubt by the brevity of the resolve of the Treasury and the Fed not to offer up money. Remember, we reported that a takeover was in the works before 2 in the afternoon. At that point, it had been under discussion for hours.

So maybe we do understand this thing after all. One one woman recently said to us: “The only difference between Wall Street and the Titanic is that the Titanic had a band.” It’s an old joke but still clever. The Titanic might have been billed as an unsinkable ship. But it turned out it could sink. Wall Street simply believes that, while it may lose a few compartments every couple decades, it is unsinkable.