The Philadelphia Stock Exchange, Chicago Board of Trade and International Securities Exchange all have been digested by larger players.

Now it is the New York Mercantile Exchange’s turn. The energy and metal market’s parent, Nymex Holdings, is set to close its $8 billion sale Friday to CME Group, the Chicago Mercantile Exchange parent that also bought the Board of Trade last year.

CME, which will control about 98% of the U.S. futures business after the deal, almost saw it slip away. Some Nymex members threatened to vote “no” after the CME said a $750,000 deal payment for each member would likely be treated as ordinary income, risking potentially higher taxes.

To limit the damage and play up benefits of the deal, CME Chief Executive Craig Donohue and other CME executives pressed their pitch personally, holding four days of meetings with small groups of Nymex members in New York. After meeting with about 200 members, Donohue and CME President Phupinder Gill flew by helicopter from Manhattan to East Hampton, N.Y., for a dinner at Palm Restaurant with Robert Sahn, an influential skeptic of the deal’s terms.

The next day, Sahn wrote a letter in support of the acquisition, and Monday CME got 80% of members’ vote, exceeding the 75% needed. The win “has a lot to do with the fact that Craig [Donohue] talked to so many of the members,” Sahn said.

The deal’s last days reminded CME Executive Chairman Terry Duffy of a “precinct captain” getting out an election vote. Donohue said Nymex members understood that recent sharp drops in financial stocks–including CME and Nymex–didn’t take away the benefits of the deal. “The effort was very hard, but I don’t think it was that hard of a decision for them,” Donohue said. “Strategically, they get it.”

Ladenburg Thalmann analyst Richard X. Bove lamented about Lehman Brothers Holdings today, “The major question related to this company at the moment is: ‘Why isn’t anything happening?’” Well his report, which seemed to encourage a hostile takeover of Lehman, certainly caused something to happen: an 8% jump in the securities firm’s stock price during the afternoon, after an early decline.

Bove upgraded his rating on Lehman in a research report that was sent to clients with the terse note: “Stock raised to a Buy. Hostile takeover now a possibility.”

In the report itself, Bove said, “Investors are unwilling to accept any positive view of the company; management is unwilling to sell out at a deeply distressed value. The stage is set for a hostile bid to takeover the whole company.”

The stage may be set, but there are no actors on it.

Lehman’s fate has been the subject of hand-wringing since March. Its stock price has fallen 70% since March 13, the day of Bear Stearns’ demise. If there were any bank that could do a hostile takeover of Lehman Brothers, chances are it would have shown its face by now. As it is, there don’t seem to be many banks that could pull off even a garden-variety takeover.

Few banks right now have enough extra capital to handle a big acquisition, and a massive integration is hardly what the doctor ordered for any bank in a world in which financial executives are furiously trying to steer their own way through the credit crunch. In addition, Lehman’s books are packed with mortgage assets. How many acquirers would be eager to explain that one to their shareholders?

Most of all, Lehman’s strength is its employees and they are known for their loyalty; it is about one-third owned by its own staff. But most takeovers of investment banks have been disastrous affairs, marked by long-entrenched cultural dissension and plentiful defections of key staff, a la Credit Suisse Group’s takeover of Donaldson Lufkin & Jenrette in 2001. A hostile takeover of Lehman surely would spook employees, likely triggering mass departures. And what would be left for any hostile acquirer? Perhaps a nice building in Midtown and vault filled with mortgage-backed securities.

Bove says the market is undervaluing Lehman–that, if you subtract the value of Neuberger Berman –roughly $9 billion to $13 billion by his accounts — Lehman’s investors value the rest of the firm at “less than zero.” It isn’t clear how a hostile takeover would boost that.

Related links:
Is It a Bad Time For Lehman to Sell Asset Management?
Why Lehman Brothers Should Not Sell Neuberger Berman
Just How Far Behind the Pack Is Lehman Brothers?

General Motors is, according to analysts, in a bit of a capital crunch. Can the auto maker get out?

Associated Press

GM needs to raise at least $6.6 billion to get to an adequate cash position by the beginning of 2009, according to a report Wednesday from auto analysts at Lehman Brothers Holdings. GM announced a $15 billion “savings and liquidity plan” this year but analysts don’t expect benefits from that until 2009 and the company is burning through cash fast, having used up $3.6 billion in the second quarter. Lehman expects GM to end this year with $14 billion of cash and next year with $9.7 billion. GM had $30 billion in cash last fall and $24 billion in June.

Deal Journal took a look at the pressures on GM’s cash position and what might come next.

Brand sales: It is no surprise now is a difficult time to sell off makers of big cars. Today GM’s agreement to sell its medium-duty truck business to Navistar International expired. Earlier in the week, both India’s Mahindra and China’s Changfeng reportedly said thanks but no thanks to the Hummer brand that GM has put on the block. (GM has publicly said there is a good deal of interest in Hummer.) GM has to sell some brands because it needs the money and wants a streamlined business that won’t require as much capital investment. As part of that savings and liquidity plan, GM hopes to sell $4 billion of assets.

Financing: GM recently drew down $1 billion from a revolving credit facility–partly to “test the mechanism,” according to GM’s finance chief, Ray Young–but it hasn’t indicated a repayment schedule. Young has said the company doesn’t plan to sell debt securities to raise cash as it wants to wait for a better financing environment.

GMAC: On Aug. 6, GM paid GMAC $646 million in “residual support obligations,” according to Deutsche Bank analyst Rod Lache, who pointed out that GM’s maximum exposure to GMAC’s leasing residuals is $2.8 billion. Young, asked at the GM Annual Auto Conference this month about what assets GM considered core or those that could be put up for sale, said the auto maker’s relationship with GMAC is “evolving” and “entering a new phase.” He also made a reference to GMAC having a noninvestment grade rating in this difficult credit environment, according to analysts from J.P. Morgan who wrote a report about the event. J.P. Morgan speculated that “a creative scenario might conceivably involve a highly rated financial institution becoming the majority shareholder in GMAC-Auto, with GM’s and/or Cerberus’ stake diluted down.”

Delphi: GM still provides a lot of help for its former auto-parts unit and expects to loan $950 million to the unit to help it emerge from bankruptcy-court protection. Young also said Delphi needed to do the same kind of “self help” GM did with its independent search for liquidity. J.P. Morgan analysts believe GM may have to give Delphi another $1 billion to $3 billion to help Delphi emerge from bankruptcy.

The Federal Government: Don’t rule out a request for government intervention. Neither Young nor J.P. Morgan dismissed the possibility. J.P. Morgan wrote, “our autos team at JPMorgan equity research has received an elevated level of incoming inquires from government agencies in recent months regarding the broad topic of the [Detroit Three’s] liquidity, suggesting the government is not agnostic to the repercussions, at least to the financial system, of a potential failure of a US automaker.”

Update: We fixed Young’s name. Also, we updated GM’s cash position at year-end.

Pundits are dancing all over the grave of Ron Insana’s “Legends” hedge fund, which passed away two weeks ago. “Running a hedge fund is harder than it looks on TV,” ribbed a New York Times columnist this week.

Of course, it is easy to target Insana’s failed venture with cries of “I told you so.” A financial journalist for more than 20 years, what could Insana bring to Wall Street’s table so late in the hedge-fund boom?

Whatever it was, apparently it wasn’t enough. Still, Insana’s fate is an instructive one, full of lessons for us all.

Lesson No. 1: You gotta be in it to win it

Give Insana some credit. Who wants to go through life nagged by questions of what one “could have” or “should have” done? Taking calculated risk is essential to a prosperous and happy life. Insana took a risk and failed. So what.

He credentialed himself as more than just another Wall Street commentator. He learned a thing or two about how Wall Street actually works. He probably isn’t out of pocket all that much money. And he landed on his feet at SAC Capital.

That’s not bad for a losing day at the Wall Street casino.

Lesson No. 2: Timing isn’t everything, but it sure is important

When it comes to Wall Street, the trend is your friend. But only if you can figure out where you are in the cycle. Those investors who recently piled into commodity stocks are learning just how painful the trend’s tail end can be.

Just like Insana. He is a smart guy. He covered the internet frenzy. He saw the M.B.A.s streaming into hedge funds. He must have had an inkling that starting a hedge fund in 2006 was akin to joining a technology start-up company in 2000.

But nobody can say for sure when a trend is peaking. Not even Insana. Fifteen years at CNBC. A bit itchy to move on. Insana probably figured he might not get many more bites at the shiny Wall Street apple, even if the apple had already turned.

Unfortunately, Insana barely got a nibble. He aimed to raise $1 billion, but came up with only a 10th of that. His only regret may be that he didn’t start the fund in 2003.

Lesson No. 3: For investors, it all comes down to performance
Insana’s hedge fund was a “fund of funds.” These funds pool investor capital and redistribute it across multiple individual funds. Their fee structure is mind-bogglingly expensive.

In Insana’s case, an investor paid 1.5% of assets plus 20% of any profit for access to funds that typically charged another 2% and 20% on top. In all, an investor in Insana’s fund could easily be paying more than 5% of assets in fees on their money. By comparison an index fund charges one-twentieth of that.

Apparently, Insana posted a loss of 5% for the 14 months his fund was invested. Not bad compared with the double-digit decline in the S&P 500 over the same period, but not enough to generate enough fees for Insana and his staff or enough investor enthusiasm to put in more capital.

Which is why Insana’s fund died. It also is why the hedge-fund industry shake-out will continue. For investors, it all comes down to performance. And the law of averages means only half of the hedge funds can outperform.

Lesson No. 4: It ain’t easy to report on Wall Street and make your fortune on Wall Street

As a one-time investment banker turned columnist, I can tell you it is a tough balancing act for a journalist to cover Wall Street and its armies of financiers. How does a journalist juggle the need for sources with the need for unvarnished reporting? What should the relationship be between a journalist and his sources?

The case of Ron Insana and his hedge fund highlights how permeable the boundary can be between the worlds of journalism and Wall Street.

Insana reported on Wall Street and hedge funds for years. He then leveraged his Rolodex to start a fund of funds whose primary selling point was his access to those hedge funds. While raising and investing the capital, Insana continued to appear on CNBC—identified as a senior analyst. When his hedge fund didn’t pan out, he ended up at Stevie Cohen’s shop at SAC.

I don’t begrudge Insana his jump to the hedge-fund world. Like everyone else, he is just trying to make a buck–and finding out just how tough that can be.

Have government-investment funds from the Middle East and Asia learned a lesson?

Sovereign-wealth funds, as they are known, made a splash investing in Wall Street firms at the end of last year and the beginning of this one, but those investments haven’t turned out so well.

So when Lehman Brothers Holdings went looking for a capital infusion to offset expected third quarter write-downs, it came up empty. The Financial Times reports that the Wall Street firm came close to selling a 50% stake to Korea Development Bank this month before talks fell apart. The Financial Times also reports Lehman held similar talks with China’s CITIC Securities. Yet CITIC told Reuters it has had no formal talks about buying a stake in Lehman and “will focus on its domestic business this year due to concerns about snowballing U.S. credit problems.”

So where will Lehman turn next for cash, asks Reuters’s DealZone. Singapore may offer a ray of hope. Temasek, the Singapore state-owned investment company and Merrill Lynch’s biggest shareholder, may boost its stake in the brokerage house, reports Bloomberg.

In more SWF News

An interesting point via the FT’s Alphaville blog from Citigroup’s Robert Buckland, who in his latest Global Equity Strategy note claims a new carry trade–with SWFs poised to be prime beneficiaries:

Tidbits

Olympics Extra

From the New York Times’s Rings blog: Who is better, Kobe Bryant or LeBron James?

In the world of private equity, few deals mean little action and fewer returns. But behind the scenes, chunks of private equity portfolios are changing hands at record levels.

Laurence Allen, the CEO of NYPPEX, has a front-row seat. His firm advises investors who want to sell their holdings in private equity funds and serves as an exchange where they can trade their stakes.

Deal Journal Primer: Such sales are called “secondaries.” Here’s how they work (click and scroll down): The private-equity world is comprised of general partners like Blackstone and Madison Dearborn Partners and limited partners that invest in those funds. When LPs want to exit all or part of their holdings, the sales are called secondaries. Allen expects $18 billion of secondary sales in 2008, up from the record $15 billion of 2007.

It is a simple process but, most of the time, it is out of the public eye. That is changing. In a widely publicized deal last week, a Goldman Sachs Group-led consortium bought a big chunk of ABN Amro’s private-equity investments from Royal Bank of Scotland and other banks. “Five years ago, 99% of deals were kept quiet. Today, 80% are kept quiet. You’re seeing greater transparency in the asset class, which most people like,” Allen says.

That isn’t the only change. Private-equity firms themselves are starting to sell chunks of their own portfolios–sometimes to speed up the monetization of their profits, sometimes to raise money to pay off investors, and sometimes to get rid of investments that are dragging down their returns.

Deal Journal talked to Allen to find out why secondaries are becoming so popular. Here are some of the highlights of that conversation:

Secondaries are a way for PE firms to offset declining returns from their investments: “Many institutions are evaluating rebalancing their portfolios….Many general partners are interested in making cash distributions to their investors.

Prices are still strong: “The prices in the secondary market are reasonable, down from historical highs in the second quarter of 2007 but have not declined as much as the public markets.”

The private-equity downturn will last for several years: Low valuation multiples for companies and the credit crisis have conspired to make the current private-equity downturn “more analogous to the 1970-to-1980 period. It’s going to be a longer period than two to three years.”

PE firms can wait out the downturn for a long time by relying on secondary sales: “We believe they can sell quite a bit. We believe that the market is a more accepted third alternative for exits.”

PE firms can borrow against their portfolios: “A different deal structure we’ve seen is not outright selling, but instead borrowing against the assets. That has become a big business for us. In other words, the private-equity firms ask us to arrange a credit facility for up to 50% of the fair-value assets. The reason for that is the firm doesn’t want to sell the assets, they just want more liquidity or to book a loss on the sale.”

Related links:
Secondaries join the mainstream
Goldman Sachs and Credit Suisse in Secondaries Race

U.S. investment banks are expected to post the largest year-over-year decline in revenue in the third quarter, according to Brad Hintz, an analyst at BernsteinResearch.

Hintz forecast that investment-banking revenue will fall 45% to 48% from the year-earlier period, based on the data from research provider Dealogic. “Based on our expectations, this quarter will mark the worst year-over-year decline in quarterly investment banking revenues for the group for as far back as we have good data,” Hintz said.

Goldman Sachs Group, Lehman Brothers Holdings and Morgan Stanley will report in the middle of next month.

The fixed-income environment substantially weakened this quarter and Hintz estimated there will be further write-downs caused by mortgage-related securities as well as ineffective hedges. “We still do not think that the brokerage stocks are out of the woods concerning their current exposures to collateralized debt obligations, residential and commercial mortgages and commercial real estate,” he said. “While we think that the bulk of sub-prime related writedowns related to residential mortgage positions are behind us, we still expect to see the securities firms take valuation adjustments from their ‘higher quality’ residential mortgage portfolios.”

Hintz lowered his estimate for Lehman Brothers for the third quarter to a loss of $1.40 from earnings of $0.74 per share and estimated the bank will take $3 billion in write-downs. He also lowered his per-share profit estimates for Goldman Sachs and Morgan Stanley 20% to 25% each, to $2.50 and 81 cents, respectively.

–Shanny Basar is U.S. Correspondent for Financial News, a Dow Jones publication and a contributor to Deal Journal.

Venture-capital investment in India more than doubled in the second quarter after a relatively level amount of money moved into start-up companies there in the past few quarters.

Venture firms invested $237.6 million across 17 deals in the three months ended June 30, compared with $108 million and 12 deals a year earlier, according to data from VentureSource, a unit of Deal Journal publisher Dow Jones. Since the first quarter of 2007, when venture capitalists flooded India with $436 million across 41 deals, investment had held steady at a quarterly average of roughly $118 million through the first quarter of 2008.

The biggest contributor to this year’s second-quarter jump is the $70 million, second-round investment in Laqshya Media, a Mumbai provider of out-of-home media advertising services.

Even with the second-quarter pop, investment is down through the first six months of the year, in part because of the strength of last year’s first quarter. Investors have put $360.5 million in 35 deals in the first half, down from $544 million and 46 deals a year earlier. By comparison, venture firms invested $2.15 billion in mainland China companies in the first six months of 2008.

Like China, venture firms are funding more later-stage Indian companies instead of buying into new start-up business: 74% of first-half deals in India involved companies that were profitable or were shipping a product, while 23% dealt with start-up companies still in product development and just one company was newly formed.

By industry, the advertising and marketing space drew the most capital, with $89 million directed into five companies. Other industries receiving at least $20 million included food and drug retailers, automobiles, shopping and heavy construction/infrastructure.

Draper Fisher Jurvetson topped investors in the second quarter with three deals, while Kleiner Perkins Caufield & Byers, Sequoia Capital, Trident Capital and angel investor Mumbai Angels made two deals apiece.

–Scott Austin is an editor at VentureWire, a Dow Jones publication and a contributor to Deal Journal.

By Stephen Grocer and Heidi N. Moore

Deals of the Day includes all the major news of the morning related to mergers and acquisitions and financing. For breaking deal news, turn to the WSJ’s Deals & Deal Makers page, or click here to automatically sign up for Deals Alert emails.

Mergers & Acquisitions

We found a buyer. We found a buyer: Steve & Barry’s will survive as a going concern after Bay Harbour agreed to buy its assets for $168 million. [WSJ]

CVS-Longs: Investor Bill Ackman and shareholder Advisory Services are not happy with the deal. [New York Post]

Good things come in small packages, right? IAC faces a test to become more profitable as a smaller entity as it prepares to spin off four big properties. [WSJ]

Fine. We’ll merge with you. But don’t try any funny stuff: Continental AG relented its opposition to a takeover by rival auto supplier Schaeffler Group in exchange for substantial concessions, including a raised offer of $112 a share and guarantees not to take a majority stake before 2012. [WSJ]

Shaking it up: U.K.’s Competition Commission is set to break up BAA’s airport monopoly, forcing it to sell three airports. [The Independent]
Related: The sale is just a first step in curing what ails the U.K.’s airports. [Daily Telegraph]
Related: Ferrovial of Spain is objecting to the BAA break-up plan. [FT.com]

Financial Institutions

The world’s most profitable bank: Industrial and Commercial Bank of China. [Bloomberg]

I can’t quit you: Singapore’s Temasek, which already took a beating on Merrill shares, may buy more in a bet that the bank will rebound. [Bloomberg]
Related: Merrill CEO John Thain is going to meet with the head of South Korea’s sovereign wealth fund. [Dow Jones Newswires via eFinancialNews.com]

Goody Proctor was consorting with the devil: The Fed quietly called Credit Suisse last month to see if it had pulled a line of credit from Lehman Brothers in response to a rumor. [WSJ]
Related: Lehman Brothers held talks to sell up to 50% of its shares to Korean or Chinese parties during the first week of August, but failed to reach an agreement with either. [FT.com]

Barnum & Bailout: Fannie Mae and Freddie Mac need to refinance $225 billion of debt by the end of September. Investor interest may hinge on the details of any potential government bailout. [WSJ]
Related: Hank Paulson’s “bazooka” (the threat of a government bailout, people) is spooking investors. [Bloomberg]

Today in capital infusions: Evercore Partners has arranged a $120 million cash injection from Japan’s Mizuho Corporate Bank, making the Wall Street boutique the latest U.S. bank to seek a capital infusion from abroad. [WSJ]
Related: Lone Star Germany (a unit of Lone Star Funds) bought a 91% stake in German bank IKB, which has lost 90% of its market value since July 2007. [WSJ]

Buyside

Go West, young man. Or East. Or, really, anywhere but here: U.S. buyout firms are increasingly investing their money overseas. [Reuters]

Today in hedge fund blowups: Andor Capital Management, a hedge fund controlling about $2 billion in assets, is closing down and returning money to investors. [WSJ]

Capital Markets

InBev-Anheuser-Busch: InBev’s $45 billion financing of the deal is likely to push loan prices higher and, apparently, ruin the M&A financing market as we know it, according to Reuters. This is why Wall Street can’t have nice things. [Reuters]

Junk debt: Wall Street has less “junk in its trunk” as investment banks shy away from leveraged loans. [New York Post]
Related: Junk volumes are at their lowest since 2002. [Deal Journal]

Companies & Industries

Microsoft: The software giant is enlisting Jerry Seinfeld as a spokesman for its new ad campaign, which uses the tagline “Windows, not Walls.” Mr. Softie’s target is Apple. [WSJ]
Related: We totally called it when we described Google as Microsoft’s Newman. [Deal Journal]
Related: In June we talked about Apple, Microsoft’s other nemesis. [Deal Journal]

People & Players

RBS: The bank added six mergers and acquisitions bankers to its Asian team. [eFinancialNews.com]

HSBC Global Asset Management: Shuffling its multi-manager team. [eFinancialNews.com]

How Bad Is It? is a Deal Journal feature focused on confirming or debunking the worst fears about the credit crunch.

Groucho and Chico Marx once shared a funny bit in the movie “I’ll Say She Is.” “The garbage man is here,” declared one. “Well, tell him we don’t want any,” his brother retorted.

More than a year after the credit crunch hit, investment banks still are facing full trash bags of old leveraged loans, and no matter how slowly they issue new junk bonds, they seemingly can’t dump enough old debt to make a difference.

Here is how slow things are: there have been only $1.7 billion of so-called new money high-yield debt issues since the end of June. That is the slowest issuance pace since 2002, according to Standard & Poor’s Leveraged Commentary & Data. It is more than a summer slowdown. High-yield issuance is down 47% for the year, falling to $55.2 billion from $103.3 billion a year earlier. The primary market–in which banks sell new junk-bond issues–is running at roughly a 61% deficit from last year, according to Standard & Poor’s LCD.

The pipeline of high-yield deals coming to market resembles a roll-call of zombie leveraged-buyout debt. The vast majority of the $3.5 billion of bonds attached to last year’s buyout of Home Depot’s HD Supply arm, for instance, still is largely sitting with underwriters J.P. Morgan Chase, Merrill Lynch and Lehman Brothers Holdings, according to Standard & Poor’s LCD. The last time any part of HD Supply’s debt was sold was last August.

The calendar of high-yield debt offerings has more blasts from last year’s buyout past: $11.3 billion of high-yield debt for Canadian telecommunications operator BCE; $4.3 billion for credit-card processor First Data; $4 billion for satellite operator Intelsat Bermuda; $2.3 billion for broadcaster Clear Channel Communications; and $1.8 billion for casino operator Harrah’s Entertainment.

Investment banks including Goldman Sachs and J.P. Morgan have tried to distance themselves from those hoary old loans by labeling them “legacy” loans. The term is mostly for the benefit of psychology. It allows the banks to get a fresh start: to mow the lawn, paint the fence, and make sure the house looks tidy. That is a tall order, however, with the giant dumpster of leveraged loans sitting in the driveway.

Related links:
80 Cents Buys You a Candy Bar or a Leveraged Loan
J.P. Morgan: Let’s Put Past Loans Behind Us
How to Ditch Your Bank and Do Your Own Financing
Leveraged-Loan Backlog Winnows, But Goodbye PE Fees
BCE: Citigroup Doesn’t Want to Talk About It, Okay?
How Bad Is It?: The Tale of Sisyphus and Leveraged Loans