Wall Street’s credit influenza will send shivers through the energy patch before long, and the FERC is prepared, Commission Chairman Joseph Kelliher said Thursday. Meanwhile, financial markets continued triage, with players aligning to deliver life-giving capital transfusions to the stricken.

“Many of these [Wall Street] companies are heavily involved in electricity and gas trading, and some of the turmoil these companies are experiencing raises credit and collateral issues,” Kelliher warned. “There’s a very wide prospect of a number of urgent Section 203 [merger and acquisitions] filings coming before the Commission. That’s something we saw earlier in the year with JPMorgan and Bear Stearns and the Commission…[W]e are monitoring the situation and the Commission’s ready to act.”

Kelliher reminded his listeners at Thursday’s regular meeting of the Federal Energy Regulatory Commission of the late 2001 demise of Enron Corp., which “completely disappeared from the scene. And the industry managed that sudden disappearance very well. I think we might have to do some of our quick work we did earlier in the year more than once coming up.”

Late Thursday investors cheered news that Treasury Secretary Henry Paulson was considering the formation of an entity similar to the Resolution Trust Corp., which was established to fix the savings and loan crisis of the late 1980s and early 1990s. Traders saw federal intervention as a means to lift the weight of bad mortgage debt and stop the drain on capital. They led the Dow Jones industrials to a 409-point surge, the biggest one-day rally in five years.

The Wall Street meltdown to which Lehman Brothers succumbed (see Daily GPI, Sept. 16) and which sparked a fire sale in Constellation Energy shares (Thursday’s close: $24.20, down 2.3%) and its subsequent takeover by MidAmerican Energy (see related story) is now rattling the rafters at Morgan Stanley as a record drop in the venerable firm’s share price has hedge funds heading for the exits, according to a Bloomberg report. Hedge funds, which account for less than 10% of Morgan’s prime-brokerage balances withdrew money or told the firm they planned to, Bloomberg, citing an unnamed source, reported Thursday. Morgan was in talks with credit-troubled Wachovia Corp. about a possible merger, the logic of which was being questioned by some. Shares of Morgan closed at $22.55 Thursday, up 3.68% but well off the 52-week high of $69.87.

As for early casualty Lehman, would-be savior British bank Barclays Wednesday struck a deal to acquire the bankrupt firm’s core capital markets business for a mere $1.75 billion, which was far less than what Lehman had hoped to get. The deal could save up to 10,000 Lehman jobs and allow Barclays greater reach in the United States.

And the government’s $85 billion bailout of insurance giant American International Group Inc. (AIG) was troubling to both Democratic and Republican lawmakers, with some criticizing the decision to put American taxpayer money at risk to bailout private industry. AIG shares closed at $2.69 Thursday, up 0.64% but only a fraction of their 52-week high of $70.13.

“Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off,” said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee. However, President Bush defended the bailout of AIG, as well as the earlier bailouts of mortgage giants Freddie Mac and Fannie Mae as “necessary and important” and said “the markets are adjusting to them.”

While Washington pondered the “too big to fail” argument for rescuing troubled institutions, some called for more action by the administration, lawmakers and regulators to stanch the flow of red ink on Wall Street.

“The contagion in the financial markets continues to spread,” said Richard Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. “While we should applaud the actions taken so far by the U.S. Treasury and the Fed[eral Reserve] to stabilize the financial system, more action is needed. This crisis began with concerns about liquidity but is becoming a solvency crisis. In our comment this morning, we note that there appears to be a growing retail run away from the banks. The irony of the current situation is that the hedge fund community is destroying the infrastructure they need to function.

“When the remaining independent broker-dealers are gone, the surviving hedge funds will be forced to do business with the BD subsidiaries of commercial banks. Bank-owned dealers are going to become far more regulated in the years ahead and these regulators will seek to reach through the banks into the hedge funds to gain information about their operations.”

In a Wednesday report, Standard & Poor’s Ratings Service (S&P) said regulatory intervention, merger and bankruptcy are the three primary options for failing firms, while the fourth option — recovery — has yet to be seen.

“The bankruptcy filing by Lehman Brothers Holdings Inc., the largest among financial institutions in U.S. history, has led us to three major conclusions: some companies are indeed not too big to fail; while the availability of liquidity can provide some form of short-term life support to an institution under severe stress, it is either real or perceived capital inadequacy that can precipitate a company’s failure; and the impact from a regulatory action or inaction can have unintended consequences through indirect exposures and linkages that sometimes are only known to direct market participants,” said S&P credit analyst Rodrigo Quintanilla. “Moreover, the current instability in the financial system is coming at a time when the U.S. economy is already weak and continues to deteriorate. For now, Lehman’s orderly resolution will take some time, and it is unclear who the real losers are and how much will be lost. But from an industrywide perspective, the loss of an important player could offer franchise-enhancing and profitable opportunities to those that survive.”

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