My BNET Finance colleague Alain Sherter isn’t all that optimistic about the chances for a smooth exit for Citigroup (C) out of the U.S. government-debt program:

The company is still sitting on mounds of bad loans. It remains unclear exactly how much in provisions Citi might have to sock away in coming quarters to account for those losses. And the company’s shaky balance sheet suggests it may well have to raise more money.

After calamitous financial events, it is common for all sorts of silly, anti-competitive financial policies to sprout up from the populist-infused aftermath. Such was the case with the introduction of Sarbanes-Oxley in the early decade: instead of keeping accounting standards more tightly policed, the regulation had the deeper effect of sending a whole generation of Chinese enterprises eastward in their search for capital in order to avoid burdensome U.S. regulations.

Britain today is experiencing something of a Sarbanes-Oxley moment. Earlier on, Chancellor Alistair Darling announced that banks will be forced to pay a one-time levy of 50 percent on bonuses higher than £25,000, or $40,800. In addition, top-rate income tax on earnings of more £150,000 will rise to 50 percent, he said:

When Morgan Stanley (MS) appointed James Gorman, an ex-retail broker with a consulting background, to succeed chief executive John Mack earlier this year, many took it as a sign of the times that sales and trading were about to play a backseat role in the firm’s future. Gorman could not have been a more different choice for the job than Mack, who hails from the rough, foul-mouthed, think-on-your-feet world of bond trading.

Now it appears — on the surface, at least — that there is further evidence of Morgan Stanley’s transition into a more operations-focused bank, with multiple new appointments. Colm Kelleher, the firm’s chief financial officer, along with investment banking head Paul Taubman will take charge of Morgan Stanley’s institutional securities unit, it was announced earlier today.

Wednesday, Bank of America (BAC) stated that it will be ready to buyback $45 billion of its preferred stock which is currently held by Treasury. It plans to do so by taking a fourth-quarter charge of $4.21 billion, and by raising a whopping $18.8 billion in cash from the sale of common stock. (Effectively, the deal is a less tightly-executed version of a recent Zions Bancorporation (ZION) transaction, where shareholders agreed with the firm to swap preferred stock for common stock, in anticipation of big rises in the latter in the future.)

The companies that make the list will be asked to write “living wills.” These will detail plans for an orderly wind-down in the event that another financial crisis makes them unable to stay operational.

It has long been known that banks use derivatives both as insurance products to protect themselves against calamitous events and as speculative products to engineer outsize returns. In the case of banks in Abu Dhabi last week, they appear to have been using credit default swaps and other complex financial instruments in order to strong-arm more financial control out of Dubai.

Friday, I reported how some international bankers were speculating that the surge in buying of CDS on Dubai’s government debt was a “squeeze play” by Abu Dhabi, organized by the latter to wrestle more control over the former (see story here). This weekend, I heard from various other financial professionals who expressed support for that theory. Judging by a wire report this morning, Abu Dhabi isn’t being particularly shy about its intention now, either:

A surge of lending by Chinese banks at the start of 2009 is coming back to haunt them. Loose Chinese lending practices, which helped fuel an unprecedented rise in asset prices on the mainland this year, is beginning to hamper the banks’ capital adequacy ratios.

China’s five largest financial firms are suffering an erosion of capital after lending out an estimated $1.3 trillion this year. That represents a rise of over 40 percent for many of the banks’ loan portfolios, including Bank of China (BACHF.PK), and around three times the amount of this year’s government stimulus.

This week, speculation has been running rampant that developed countries are about to default on their government bonds. Tuesday, something of a pre-Thanksgiving rally formed around credit default swaps (CDS) on government bonds of Italy, Greece, the U.K. and the U.S. But it is an oil-rich city state that has become the first perceived default casualty: Dubai.

Profits might be surging at banks with big trading divisions, but lending remains stuck in the mud. In the third quarter, lending by U.S. banks dipped $210.4 billion, or 2.8 percent, representing the largest drop off in 25 years.

Partly as a result, the Federal Deposit Insurance Corporation (FDIC), which insures consumer deposits in the event of a financial institution bankruptcy, swung $8.2 billion into the red in the same quarter. But even as the number of problem banks increased by one third, to 552, banks overall posted earnings of $2.8 billion vs. a loss in the previous quarter of $4.3 billion.

It’s (semi-)official: securitization is making a comeback. Barring any country-size defaults, most expect the securitization market to pick up rapidly in the next year or so, as evinced by the Federal Reserve’s unwinding of its mortgage-related assets purchase program.

Credit default swaps, once all the rage among investors in the days when multi-billion dollar investment banks such as Morgan Stanley (MS) and Goldman Sachs (GS) faced bankruptcy a little over a year ago, have slowed in appeal this year as global markets have made a big push towards risk.

Common stock is perceived as a riskier asset than preferred stock, since holders of the latter tend to get paid out something in the event of the bankruptcy, whereas common stockholders do not. The division between the two has been especially wide in the event of hundreds of small- and medium-sized lender bankruptcies this year, most spectacularly in the case of CIT Group (CITGQ.PK).

With Goldman Sachs (GS) and Warren Buffett (BRK.A) sponsoring a $500 million loan package for small businesses in the wake of this year’s largest bankruptcy, that of small- and medium-sized business lender CIT Group (CIT), lending to the nation’s little organizations has never been a hotter topic than it is now. With this in mind, I spoke with Dan Drechsel, chief executive of Atlanta-based small-business financial solutions boutique Financial Transaction Services (FTRANS) yesterday to get a behind-the-scenes view of the market.

Hedge funds are back in vogue, but (or perhaps because) finding those windfall gains is becoming a much harder job than it was at the beginning of the year.

In October, net inflows to hedge funds totaled $10.2 billion, representing more than a five-fold increase over new investment levels six months ago. In the same month that they received record investment, however, hedge funds overall lost money: $2.4 billion, to be exact.

The announcement follows an uncharacteristic apology by Goldman’s chief executive Lloyd Blankfein for helping to cause the financial crisis. Goldman “participated in things that were clearly wrong and have reason to regret,” Blankfein told the Financial Times earlier this week.

As the gap between the size of the largest and smallest U.S. banking institutions has widened this year, so has another metric: the average salary of individual investment bankers and those working in other industries.

While many Americans will count themselves lucky to be drawing any kind of income at all this year, bonus payments will rise by 40 percent for most bankers, according to a recent survey conducted by New York-based Options Group. The survey’s results are supported by recent NYSE data which suggests that Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JP Morgan (JPM), Morgan Stanley (MS), and Wells Fargo (WFC) have set aside $112 billion in compensation for their employees this year.

In the traditionally sluggish world of Japanese banking, a high speed chase for cash is getting underway among megabanks as the firms gear up to tackle the challenges of the next decade. In the midst of the chase, a seismic shift may be about to take place between two of the country’s biggest banks.

Last week, Mitsubishi UFJ (MTU) announced that it might raise as much as $15.5 billion in the sale of new shares. Days later, Mizuho Financial (MFG) was rumored to be mulling a $12 billion share sale in order to keep pace; even then, it may ultimately need as much as twice that amount.

“We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.” To drive home his point, he makes a remarkably bold claim. “We have a social purpose.”

CIT Group (CIT), an embattled small business lender that filed for bankruptcy Sunday as a result of lack of government-sponsored financial assistance, is now hoping regulators will give it a second chance to turn itself around.

The firm’s Chapter 11 filing appears to be the oddest kind of bankruptcy in a very long time. The 101-year old firm will be allowed to draw on $125 million of a $500 million loan from Bank of America (BAC), pay employees and vendors, as well as make intercompany loans, U.S. Bankruptcy Judge Allan Gropper ruled earlier today. “We are on a very fast track,” Gropper told the court.

The investor who once famously remarked that his best holding period for a stock is “forever” is unloading portions of his holding in a firm many believe to be a key culprit of the financial crisis.

Friday, Berkshire Hathaway (BRK.A) announced that it sold 2.9 percent of its $874 million position in Moody’s (MCO), raising $28.7 million. That’s the second time in the last 6 months that Berkshire has reduced its position in the credit-ratings agency: in July, the firm sold a chunky 17 percent of its stake in Moody’s, bringing its total holdings percentage-wise into the teens.