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MetLife, Inc. (NYSE: MET), which is the largest life insurer in the U.S., got its start 140 years ago. But the recent couple weeks may have been the toughest as the stock price has plunged.

It seems MetLife's woes have just started, though, as the company announced Tuesday it has withdrawn its 2008 earnings estimates. As for Q3, the company expects operating profits of $600 million to $675 million.

At the same time, the company wants to sell 75 million shares to bolster its capital (obviously, this is something that's pretty dilutive in the current environment).

Interestingly enough, MetLife is feeling the pain from heavy investments in alternatives such as hedge funds and private equity. What's more, MetLife holds positions in losers such as Washington Mutual and Lehman Brothers.

Of course, MetLife is not alone. If anything, major insurers have been quite aggressive with alternative investments. Just take Hartford Financial Services Group Inc (NYSE: HIG), which recently pre-announced weak results and raised $2.5 billion from Allianz. This firm too has had to take charges for its alternative investments.

MetLife shares are trading down 6.4% in pre-market trade.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

Hedge funds have decided to curtail their risks. That means no reward. The reason for putting money into hedge funds, big upside for investors, may be going away.

According to the FT, "Citigroup estimates that hedge funds have now placed $600bn in cash, and that $100bn of this is held in money market funds." These large investment firms do not want to be crushed by the current credit crisis.

The hedge funds are making a mistake by turning away from their charters to use leverage and chancy tactics to make money, even it the odds have become extraordinarily higher.

Distressed assets could become the next great wave of money-making investments. Even the Treasury thinks so. It is telling Congress it can make money on the toxic assets it is buying from banks. Those financial instruments may come back with improvements in the housing and mortgage markets.

The banking market is also awash with corporate IPO debt which often sells for 80% of its face value. Some of these investments will fall apart, but most of the companies are likely to be fine coming out of a recession.

Hedge funds are turning their backs on what may make them extraordinary money machines during a time when potential rewards are reaching a peak.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Watch for more hedge fund closings. They are coming. According to the FT, "Hedge funds are having their worst start to the year on record after March turned into one of the ugliest months for popular strategies and several funds imploded."

The news is bad for the hedge fund managers, but even worse for banks and brokerages that may have loaned them money. Even in a liquidation, these financial firms may not get all of their money back.

Institutional investors, like fund companies, also have money in hedge funds. That could affect the performance they post for their corporate and individual investors. Wealthy individuals often put capital into hedge funds as well.

If the hedge fund debacle gets worse, banks may have to write off the difference between what they loaned and what they got back in liquidation. Just another minefield for money center banks and brokerages.

And the number of trouble spots seems to be growing.

Douglas A. McIntyre is an editor at 247wallst.com.

BusinessWeek reports that The Bear Stearns Companies (NYSE: BSC), which reported earnings today, is behind $10 billion worth of Collateralized Debt Obligations (CDOs) at Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC). It all comes down to yet another new word to add to your financial vocabulary -- Klio Funding -- a brand of CDO that enabled Bear to sell to the $2 trillion money market fund industry.

What is Klio Funding and how did it cause all this damage? Klio Funding is "an entity" that sells Commercial Paper (CP) -- short-term loans -- and uses it to buy higher-yielding long term investments. Since Citigroup had agreed to refund investors' initial stakes plus interest -- through liquidity puts -- money market funds that bought Klios thought they would get higher yields at low risk.

Meanwhile, Ralph Cioffi -- who headed up three Bear hedge funds which eventually folded -- used money raised from the Klios to buy CDOs and to lock in year-long financing for his hedge funds. This is significant because hedge funds typically can only borrow money for weeks at a time due to their risk. Cioffi's CDOs were popular, raising $100 billion.

The big banks must not be feeling very loved right now. The New York Attorney General is investigating their handling of subprime loans, and spent its summer issuing subpoenas to banks like Merrill Lynch & Co. (NYSE: MER), Morgan Stanley (NYSE: MS) and Deutsche Bank AG (NYSE: DB).

Now the Securities and Exchange Commission is investigating whether banks and the hedge funds they invest in are colluding to share inside information, such as the specifics of a given fund's strategies, to gain insight into the future of the market.

Little information has been made available on the exact nature of the SEC's investigations. Because hedge funds are private, they are not required to publicly disclose SEC investigations the way the way that a public company would in the face of a formal inquiry.

The hedge fund industry has grown extremely rapidly over the past few years to its current size of $1.9 trillion, and regulators probably have a fair amount of catching up to do in terms of investment malfeasance.

The Wall Street Journal reports [subscription required] on the little-understood risks associated with hedging, particularly at some major financial institutions:

. . . some worry that today's improved and sophisticated hedging techniques have created a false sense of security among investors, and that a dramatic market collapse is still possible if issues arise in areas where there is little transparency, such as the world of derivatives.

The important thing to remember is that hedging can't really eliminate risk -- risk can only be transferred. It's like the first law of thermodynamics. It can be transferred from one trader or institution to another but it can never be eliminated. With some of the major investment banks having booked big gains on bets on the subprime collapse, many on Wall Street are still wondering who was on the other side of the trade. And there is also concern that the banks are failing to make adequate disclosures about how they are making their money. Some have asked whether the banks' earnings are, as Enron's earnings were once described, a black box.

Whenever you hear about hedging and risk management, remember that one company can control its risk. But there always has to be another party to the trade and there is simply no way for the economy as a whole to eliminate the risk of giving mortgages to people who can't afford them.

An article in today's Wall Street Journal discusses the strength of hedge funds in numbers. It seems that when they team up to take on managements they believe to be incompetent, they are more likely to effect change.

According to The Journal, "Hedge funds often hunt in packs. In a typical case, several of them have independently acquired shares of a company perceived as undervalued, waiting for the right moment to push for a sale. Once one fund jumps in with a public demand, the rest follow."

This makes perfect sense: a group of funds can generate more publicity and can gain control of more shares, which is helpful if the matter ends up in a proxy fight. The threat of having more shares collectively may also make company management more likely to cede to the activists' demands.

Some companies have fired back, arguing that the law requires that funds collaborating disclose their relationship. However, the hedge funds usually say that they have no formal relationship.

In any case, investors should probably ignore the whining of executives as indicative of the fact that they are worried about their power. History has demonstrated amply that when activists get involved, investors prosper.

Sometimes, though, executives go after hedge fund managers who are short their stocks, accusing them of collusion. Read about the bizarre case of Fairfax Financial (NYSE: FFH) here.

Pirate Capital will no longer allow its investors to withdraw their booty.

According to Bloomberg, the firm has barred withdrawals from its two Jolly Roger activist funds in the wake of an 80% decline in the firm's assets under management in the past year. The lock-up will not effect the firms two larger funds.

Pirate's Thomas Hudgson is one of the most famous of the activist investors. The Jolly Rogers funds take large positions in companies -- including Pep Boys and Brink's -- and then pushes for changes such as new management or a sale of the company. Hudson is currently on the boards of both of those companies.

But with the private equity industry declining and the credit markets weak, activists have lost one of their favorite pieces of ammunition: Getting a company taken private is not as easy as it once was, leaving activists without a key maneuver to boost a stock price quickly. Remember when companies were soaring 10-25% in one day just because they announced a decision to "explore strategic alternatives"? That's getting to be a lot less common, and may be a big reason that Pirate's funds are struggling: People just aren't optimistic about deals getting done.

This post was originally written by Douglas S. Roberts for BlogginStocks.com.

The Fed along with the other central banks continued to infuse liquidity into the markets via the discount window and other means and has indicated that it will continue to do so until the credit situation stabilizes. Why the continuing concern in the financial markets?

The Fed has indicated the stability of the banking system and the health of the economy are its primary concerns. The survival of hedge funds, traders, and other financial players is only a problem if it affects these primary concerns. Through the Discount Window, the Fed has found a way to assist the banks only.

This has caused quite a panic among hedge funds who claim that this approach cannot work. In essence, they say that the hedge funds are too big to fail without ripple effects throughout the economy. This may not be quite the truth. In 1984, the Fed successfully took over and later sold the then seventh largest bank called Continental Illinois National Bank and Trust Company. It too was considered "too big to fail." The economy continued to prosper.

Remember the Fed has substantial reserves to implement monetary policy as they see fit. It does not pay to fight the Fed. It can persist in its course of action longer than you can remain solvent. Today, it appears determined that the non-bank players who took on too much risk bear the consequences of their actions. In its view, the downsizing of Wall Street bonuses does not constitute a valid reason for a rate cut.

For those financial market participants who believe that deterioration in the economy will force the Fed to cut the Federal Funds rate, I would not be so sure. The economic numbers thus far have held up. The initial unemployment claims numbers this morning were in line. The Fed will cut rates if the numbers deteriorate. However, those seeking a bailout like 1998 may be disappointed.

Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices.

Hedge funds escaped regulation by arguing that their problems would only affect their sophisticated investors. But this argument has as many holes in it as a slice of Swiss cheese.That's because banks lend money to hedge funds – I've seen as high as $3 per dollar of assets. And also because hedge funds buy stocks as do individual investors.

What difference does this make to small investors?

• When banks can't get their money back from the hedge funds, they write off the bad loans. Individual investors in bank stocks suffer as their prices decline.
• When banks lose money on hedge fund loans, they tighten lending terms to all their borrowers. Individual investors seeking a mortgage or car loan end up paying more.
• Hedge funds scrambling to meet banks' demands to pay back their loans will sell the liquid parts of their portfolios -- namely stocks -- to raise cash. This will hurt individual investors who happen to own these stocks.

My recommendation to the government would be to require hedge funds to disclose their holdings every day, the amount they're borrowing, and who is doing the lending.This information would enable individual investors to protect themselves from hedge funds' mistakes.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Legendary investor (and pessimist) Jeremy Grantham made a bold pronouncement in a Bloomberg article earlier this week. Grantham, who is chairman of Grantham, Mayo, Van Otterloo & Co. LLC, which manages $150 billion, said that as many as half of all hedge funds will be forced out of business in the next few years. The primary cause will be losses in the credit markets.

The main culprit is, of course, credit gone mad in the form of subprime mortgages. Grantham is quoted in the Bloomberg piece as saying, "Probably the most stretched silly credit that ever walked the face of the earth was subprime, and that was the start of it." Subprime inspired a greater appetite for risk and return, and that demand generated a massive bubble in credit markets. When the bubble pops, a lot of investors will get hurt.

Grantham has long been a voice of caution -- and some might say reason. Earlier this year, he argued that virtually all assets are in a bubble right now. In an earlier article on TheStreet.com, he is quoted as saying: "From Indian antiquities to modern Chinese art . . . from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!" The deflation of the bubble will take years, and as a result, only conservative investments make sense right now. Grantham is focusing on "high-quality" U.S. stocks and bonds. He also sees some hope for continued growth in select emerging markets.

Everything's big in Texas. Look at the state's Teacher Retirement System (TRS). In all, it has about $112 billion in assets.

Interestingly enough, the pension fund wants to devote about a third of its assets to alternatives, such as hedge funds and private equity funds. This is according to a story in the Wall Street Journal [a paid service].

Yes, when you take a look a the SEC filings of the Blackstone Group (NYSE: BX), Fortress (NYSE: FIG), and KKR, you will see that alternative investment can post strong returns.

Despite this, the TRS strategy is certainly gutsy. Keep in mind that alternative investments can be fairly illiquid. What if it gets tougher to do IPOs or get sound exits on these investments?

Or, what if there is a meltdown, as seen with the subprime hedge funds at Bear Stearns (NYSE: BSC)?

Even the pros can make big blunders. And it could be bad news for pensioners.

On the other hand, TRS's move is certainly good news for the private equity world. Simply put, there's likely to be many more assets under management -- and that means lots of juicy fees.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

In the wake of the collapse of two Bear Stearns (NYSE: BSC) hedge funds generating massive losses, some on Wall Street are wondering if the miscue could lead to the sale of the company. According to the New York Times DealBook, "CNBC's Charles Gasparino says it could. He reported Monday that if Bear's stock continues to fall - losing an additional $10 or more - the firm "clearly could be bought by a bigger player," he said." By the way, pick up a copy of Gasparino's Blood on the Street if you haven't already.

But the piece also quotes Portfolio.com's Felix Salmon, who wrote that "A $10 drop from current levels would take the stock all the way down to - oh, where it was back in September."

But my favorite quote of all comes from Bear's CEO James E. Cayne, who dismissed the takeover rumors as "old and repetitive."

Oh, I'm sorry Mr. Cayne: Are we boring you? But I suppose that the takeover rumors are boring, especially when compared with the collapses of the hedge funds that shook market confidence.

Bear Stearns does look cheap compared to the other investment banks, and maybe it will become a takeover target. But even if it doesn't, its low valuation might make it a good alternative for investors to competitors like Goldman Sachs (NYSE: GS).

With all the concerns about private equity and how it should be taxed in the wake of the Blackstone Group (NYSE: BX) IPO, Senator Charles Schumer, a New York Democrat, is coming under close scrutiny. According to The New York Times:

And many are looking to Mr. Schumer, the one they know and finance the best. That in turn puts Mr. Schumer in a tough spot. He raises a lot of money from Wall Street and has been quick to tap into the geyser of wealth made by the private equity and hedge funds.

In the 2003 and 2004 election cycle, Mr. Schumer raised $54,500 from leading private equity firms, more than twice that of any colleague on the Senate Finance Committee (not including John Kerry, who was running for president), according to the Center for Responsive Politics.

During the 2005-2006 election cycle, Schumer helped Democrats raise $385,400 from private equity managers, far more than they gave to Republicans.

While the Republican party has a reputation for being far more pro-big business than the Democrats, money may talk in this situation. So far, the issue of private equity taxation has not been a partisan one, with Charles Rangel and Charles Grassley coming forward as strong proponents of increased taxation.

This is emerging as an issue that Senator Schumer would like to go away, but with all the publicity surrounding Blackstone, it probably won't anytime soon.

Private equity bigwigs and hedge fund honchos are coming under fire for not paying their fair share of taxes. According to The New York Times, former Treasury Secretary Robert Rubin recently argued that they should pay more than double the amount that they currently do.

Under current rules, the 20% fee that most hedge funds charge on profits they earn is taxed as a capital gain, rather than as ordinary income. Mr. Rubin's take on this? "It seems to me what is happening is people are performing a service, managing people's money in a private equity form, and fees for that service would ordinarily be thought of as ordinary income."

Given the enormous pay that so many in the industry receive, it's hard to argue that they would suffer too much from paying a bit more in taxes. Mr. Rubin's argument seems to make sense: Fees for a service are income, not a capital gain.

If increased taxes are going to be levied on fund managers, this would be a pretty good time to do it. With Blackstone's Stephen A. Schwarzman making $400 million last year and planning to cash out up to $677.2 million in the upcoming IPO, few will feel sympathy.