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Merrill Lynch & Co., Inc. (NYSE: MER) announced that it would follow Citigroup, Inc. (NYSE: C) in redeeming its Auction Rate Securities (ARS). Unlike Citi -- which plans to redeem $7 billion worth of ARS by November -- Merrill will take its sweet time. According to MarketWatch, from January 15, 2009, and through January 15, 2010, Merrill will "offer to buy at par" $10 billion worth of ARS it sold to 30,000 retail clients.

This is good news and it should get the ball rolling. But there are still at least $300 billion ARS which are not yet redeemed. The list of issuers reads like a who's who of the banking world. For instance, the Wall Street Journal reports that the top 10 municipal ARS issuers at the end of 2007 were as follows:

• Citigroup ($6.7 B)
• Morgan Stanley (NYSE: MS) ($5.2 B)
• JPMorgan Chase (NYSE: JPM) ($5.2 B)
• Goldman Sachs (NYSE: GS) ($4.3 B)
• UBS AG (NYSE: UBS) ($4.2 B)

The Washington Post reports that Citigroup, Inc. (NYSE: C) has agreed to buy back $7 billion worth of Auction Rate Securities (ARS) it sold to its clients. Citi will also pay a $100 million civil fine. This is a great move for individuals and companies that bought this toxic waste. The question is -- will the rest of the $330 billion ARS industry follow Citi's lead?

Citi will buy back the debt from 40,000 customers around the U.S. by November 5. And the $100 million fine will be split -- $50 million to New York and $50 million to the North American Securities Administrators Association. Cuomo had accused Citi of "wrongly telling customers that auction-rate debt was safe, liquid and the equivalent of cash." It looks like current CEO Vikram Pandit wanted to clear the decks of a problem he inherited and in so doing help to clear Citi's name.

But the question is whether Cuomo -- having achieved this considerable victory for defrauded ARS customers -- will have the clout to clear the rest of the $330 billion worth of ARSs that were frozen. There are many other firms -- including Merrill Lynch & Co., Inc. (NYSE: MER) and UBS AG (NYSE: UBS) which have their own frozen ARS problems. And until all of these firms make their investors whole, a dark cloud will hang over their reputations.

This cloud could seriously damage their future prospects when the industry recovers a few years hence. The sooner the rest of the industry follows Citi's lead, the better.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

High gasoline prices are putting the squeeze on companies and their workers. People are leaving their jobs due to the high commuting costs. The New York Times reports that a resume service received "14 calls last week and 9 of those named high gas prices as their No. 1 reason for leaving their job."

And by my count, the Times presents seven ways that companies are changing to relieve the pressure:

• Encourage more telecommuting. The Times describes how "Citigate Cunningham, a public relations company, now encourages workers to stay home whenever possible, providing laptop computers and BlackBerrys to enable telecommuting, and reimbursing them $40 a month for high-speed Internet connections in their homes."
• Give employees money to pay for gas. Since June, OperationsInc., a human resource consulting firm, gave employees up to $100 a month on an American Express (NYSE: AXP) card "to offset rising gas prices."
• Rent offices closer to workers' homes. Microsoft Corp. (NASDAQ: MSFT) recently "leased three large office complexes far from its headquarters" to cut 7,000 employees' commutes.

The Associated Press reports that jobless claims -- at 455,000 -- hit a six-year high in July. Analysts underestimated the total by 25,000, as they forecast 430,000 such claims. When combined with this morning's disappointing July retail sales results, the economy appears to be doing worse than experts expected.

AP reports that many companies announced layoffs recently. These include General Motors Corp. (NYSE: GM), Weyerhaeuser Co. (NYSE: WY), Starbucks Corp. (NASDAQ: SBUX) and Bennigan's restaurants. More such layoffs are likely to be announced as the economy prepares a recessionary banquet of woes for the presidential candidates.

The lesson for those interested in economics is pretty clear. You can create the illusion of prosperity by borrowing lots of money. If someone lends me $100 million and I buy a big estate on Long Island, people will think I am rich. But if I can't pay back the loan, the bank will kick me out of the house and suddenly I won't look so well off.

That's what the banks are doing now across wide swaths of the economy. And it will be years before the mess is cleaned up.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Bloomberg News reports that Wal-Mart Stores, Inc. (NYSE: WMT) and Costco Wholesale Corp. (NASDAQ: COST) saw big sales increases in July thanks to $4 gas, while more upscale retailers, such as The Limited Brands (NYSE: LTD), lost business. The stock market is responding to the change and so far this year, Wal-Mart shares are up 27.8% but Costco's have fallen 5.8% (thanks to a profit squeeze due to its gasoline costs rising faster than the price it charges consumers). Limited stock has lost 10.8% during that time.

The details are worth knowing. Wal-Mart sales at stores open at least a year gained 3% while Costco's climbed 10%. Limited, the owner of the Victoria's Secret lingerie chain suffered a 5% decline. But Wal-Mart's results -- while strong -- were disappointing to investors who expected 3.4% growth. What is driving this increasing budget-consciousness? The beginning of back-to-school shopping, the suspension of sales taxes in some states, $4 a gallon gas, 9.6% inflation and seven months of job losses are all combining to push shoppers to discounters and away from pricier retail outlets.

Russian business runs on different rules. News Corp.'s (NYSE: NWS) Rupert Murdoch, who has been doing business in China for years, is nervous about his Russian enterprises. This morning, the FBI announced it had rounded up a ring of data thieves, many from former Soviet Union countries. And then there's the little matter of BP-TNK, a joint venture between BP (NYSE: BP) and a Russian company, whose Russian shareholders are booting out its Western executives so they can take over the operation.

Here's what Silicon Alley insider reports Murdoch had to say about doing business in Russia: "We have great growing business there but just -- this is purely me, I'm sorry, I'm -- the more I read about investments in Russia, the less I like the feel of it. The more successful we'd be, the more vulnerable we'd be to have it stolen from us, so there we sell now."

In case you missed it, The Detroit Free Press reports that an international ring of data thieves used wardriving -- the practice of stealing data from unprotected Wi-Fi networks -- to take 40 million identities, use the information to print fake ATM cards, and steal millions of dollars. The corporate victims include customers of TJX (NYSE: TJX), Barnes & Noble (NYSE: BKS), and OfficeMax (NYSE: OMX). Five of the 11 defendants are from former Soviet Union countries -- "one is from Estonia, three are from Ukraine, and one is from Belarus."

The Associated Press reports that BloggingStocks' parent, Time Warner (NYSE: TWX), beat Wall Street expectations by a penny a share. But its profit was still down -- 26% thanks to declining subscriber fees at AOL and lower advertising revenues at magazines like Time and Sports Illustrated.

But after adjusting for one-time gains, Wall Street was expecting Time Warner to make 23 cents a share and it actually earned a penny more. In addition, revenues rose 5% to $11.6 billion, 1.2% more than expected.

The bad news is that AOL's subscription revenue fell 29% which drove a 36% decline in operating income. As I posted, the 2006 change in strategy to emphasize advertising over subscriptions has not been able to make up for $2 billion in lost revenue. Advertising revenue rose a mere 2% to $530 million -- not enough to make up the difference.

What does the future hold? Time Warner is selling the 84% of its cable operations that it still owns to shareholders later in 2008. Cable's revenues grew 7% on "increases in cable, Internet phone and video-on-demand fees." And it is trying to sell the dial-up portion of AOL to Earthlink (NASDAQ: ELNK).

BusinessWeek reports that Wall Street has its eye on a new pot of cash -- your pension. And it's a mighty big pot -- $2.3 trillion. But Wall Street is not looking at the entire pension industry, just a $500 billion portion known as "frozen plans" that are closed to new employees and whose benefits are capped. McKinsey forecasts that frozen plans will triple to a hefty $1.5 trillion by 2013.

As usual, Wall Street's plan to buy these frozen pensions will line its own pockets and it will help companies as well. For example, if Wall Street charged a 2% management fee, that alone would generate $30 billion in revenues by 2013 if it bought all the frozen plans, but that fee income is probably the tip of the iceberg.

Companies are eager to dump their frozen pension plans. Why? These limping plans weigh down corporate balance sheet and new accounting rules will require companies to mark the value of their pension assets to market each quarter. In a down market, that could wipe out a company's operating profits.

The New York Times reports that Freddie Mac (NYSE: FRE) lost $821 million in the second quarter. Its revenues rose 10% to $1.69 billion -- including a 92% spike in net interest income to $1.5 billion. So why the loss? It wrote off 53% more loans than it did in the first quarter -- its Q2 credit losses totaled $810 million.

CEO Bill Styron, who ought to contribute his $38 million in gains to the bailout, is committed to raising $5.5 billion. It's just not clear how he is going to accomplish this. (Maybe taxpayers will provide the money.) But he has decided to cut dividends by 80% from 25 cents a share to 5 cents a share.

Meanwhile, since its early-July low of $3.89, Freddie's stock has more than doubled to $8.04. But somebody in market land is not happy with Styron's latest performance -- in pre-market, Freddie's stock is down 16%. Keep up the good work Bill!

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Freddie Mac securities.

The New York Times reports that demand for commodities in China is slowing down -- dropping from 11% to 9%. And this could be contributing to the plunge in commodity prices (about which I posted here). This could lead to more failed hedge funds and be painful for many companies. But it would be great for consumers.

The Times reports that Chinese factories reported "a plunge in new orders last month. Exports are barely growing. The real estate market is weakening, with apartment prices sinking in southeastern China." And it suggests that slowing Chinese factory demand is leading to price drops in commodities including gasoline, "copper, tin, zinc and aluminum."

Three examples from the Times illustrate the effects of the slowdown:

• Luggage. Union Bags, a Chinese luggage maker, said sales to the U.S. had "dropped 20 percent in the last year." This has led to cutbacks in Union's orders to its local suppliers of "zippers, nylon and polyester."
• Cars. Automobile demand in China is growing more slowly. "J. D. Power and Associates cut its forecast for car sales in China this year to 5.95 million -- still up from 5.42 million last year, but much less of an increase than the company's previous forecast of 6.2 million."

The New York Times reports that Freddie Mac (NYSE: FRE) CEO Richard Syron ignored warnings four years ago that Freddie was taking on too much risk by underwriting poor quality mortgages and that its capital base was too thin. Last week, the President signed a bailout bill that increases the national debt limit by $800 billion -- the potential size of the bailout of Fannie Mae (NYSE: FNM) and Freddie.

If the sources that the Times is quoting are right, the blame for Freddie's portion of that bailout rests with Syron. It interviewed Freddie Mac's former chief risk officer, David A. Andrukonis, who warned Syron that it was underwriting bad mortgages. According to the Times, Andrukonis "recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that "would likely pose an enormous financial and reputational risk to the company and the country."

Syron claims that he received enormous pressure from an un-named lawmaker pushing Freddie to take on the bad loans. So the Times reports that as Syron and others sat in a conference room reviewing the memo, Syron "refused to consider possibilities for reducing Freddie Mac's risks. He said we couldn't afford to say no to anyone."

After reading an interview in the New York Times with Merrill Lynch & Co. (NYSE: MER) CEO John Thain, I began to wonder whether Wall Street, as it currently exists, needs to change.

What's wrong with Wall Street? Here are five things:

• Rewards employees, not shareholders - It pays as much as 76% of its revenues to the people who work there (e.g., in 2006 Merrill paid $17 billion in compensation and its revenue totaled $22.4 billion). That pay is linked to revenue, not how much money their deals make for customers. This encourages them to close big deals fast rather than paying attention to quality.
• Puts its own interests ahead of its clients' - One need look no further than how firms pushed their toxic Auction Rate Securities (ARS) off their books and into the accounts of individual investors.
• Absorbs talent that could solve more important problems - That money sucks up the world's brightest minds. Those MIT PhDs could have been inventing ways to lessen our dependence on oil and gas instead of Collateralized Debt Obligations (CDOs).

My brother William Cohan's Fortune cover story on Bear Stearns' former CEO Jimmy Cayne has many fascinating tales. (Fortune and BloggingStocks share the same parent -- Time Warner (NYSE: TWX)). I found three to be most interesting.

• Bear was brought down by Fidelity and Federated Investors - Fortune argues that Bear depended on the market for 'overnight repos' -- loans of a one-day term collateralized by securities -- for $50 billion of its working capital. Bear used 71% of its mortgages as its collateral and according to Fortune, "Bear's reliance on overnight Rep effectively gave the overnight lenders -- such as Fidelity and Federated Investors -- a vote on the firm's viability every night. And during that fateful week in mid-March, those overnight lenders voted a collective no. The result? Bear Stearns did not have enough cash on hand to meet customers' demands during the run on the bank."
• Cayne nearly died of sepsis 11 months ago - The article begins, "In the early morning hours last Sept. 11, a black Town Car pulled up to the entrance of New York-Presbyterian Hospital in Manhattan. Inside the sedan Jimmy Cayne, the CEO of Bear Stearns, was close to death."
• Ace Greenberg planned to ask Barbara Walters to marry him the day before she wed Merv Adelson - Fortune says that Bear's Ace Greenberg told Cayne that he was was dating Walters and was planning to marry her. According to Fortune Greenberg told Cayne, 'I've decided I'm going to marry Barbara Walters.' The very next day in the papers she's engaged to Merv Adelson."

For the full story, read the article.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Time Warner securities.

Inflation is roaring to levels not seen since 1981. The not-so-surprising result is that at 0.8%, according to Bloomberg News, the inflation gobbled up much of the stimulus checks that went out to consumers earlier in the year.

Economists had forecast spending would rise 0.4%, after an originally reported 0.8% increase in May -- the actual result was 0.6%. That should not have surprised policy makers. When you cut interest rates from 5.25% to 2% and then run record deficits, you are just asking for inflation. And that's what the economy delivered.

But isn't it the job of the Fed to keep inflation from getting out of control? Yes. And that's just what Paul Volcker tried to cure in the early 1980s after a decade of stagflation. He raised the Fed Funds rate to nearly 20% and that broke the inflation rate that peaked the last time it was as rampant as it was last month. And it sparked an 18 year stock market rally that took the Dow from 800 to 11,500.

The Wall Street Journal (subscription required) reports that BloggingStocks' parent -- Time Warner (NYSE: TWX) -- is almost done with the work of separating AOL's 8.7 million subscriber dial-up business from its advertising one. And Earthlink (NASDAQ: ELNK), with 3.3 million subscribers, appears to be the logical partner -- particularly if it's willing to pay more than the $2 billion to $3 billion the Journal estimates its worth.

When AOL announced two years ago that it was going to get out of the Internet access business and focus on advertising, I wondered how it would come up with the roughly $2 billion it would lose from the plan to give away all of AOL's content and services to subscribers who don't use AOL for dial-up access. The plan was to replace that cash flow with advertising sales. But the most recently available comparison shows that AOL's revenue has declined 43% from $1.981 billion in Q1 2006 to $1.128 billion in Q1 2008. A 64% drop in subscription revenues to $559 million was not offset by the 41% increase in advertising revenues to $552 million.

Still, I think the idea of combining AOL's shrinking dial-up business unit with Earthlink could benefit Time Warner and yield some cost savings that would boost Earthlink's cash flow.