No, it isn’t.

Yes, Wall Street has been in a much better mood lately. Stocks have rallied, and amid the doom and gloom some good news has been seized upon and celebrated. Inflation was not as bad in April as expected, though it was in fact pretty bad. The cost of gas is still skyrocketing, but food is pausing ever so slightly to gasp for breath before another steep ascent. Home fuel oil is down a bit, but it is May after all and with diesel at well over $4 a gallon, this cannot last.

More quasi-good news: Mortgage giant Freddie Mac managed to temper its quarterly losses by doing a little accounting magic in order to minimize the effect of huge losses on its bottom line in print. Remarkably, this also cheered Wall Street and sent Freddie Mac stock soaring, even though by all accounts, including its own overly-optimistic ones, Freddie Mac is poised to lose over $7.5 billion due to foreclosures and bad mortgages over the coming two years, and is already in a heap of trouble over its past uses of creative accounting. CEO Richard Syron acknowledges that the lending behemoth needs to raise $5.5 billion in capital ASAP, but sees no real challenge in that and looks forward to future success.

Sure he does.

Toll Brothers, one of the largest homebuilding companies in the US, expects to lose another 30% this year. And foreclosures and personal debts gone bad continue to increase.

Not to be a Killjoy, but a substantial dark cloud is still mushrooming behind the sporadic silver linings Wall Street loves. Yesterday Ben Bernanke, head of the Federal Reserve, said in a speech that while credit markets had stabilized somewhat thanks to emergency measures by the Fed (such as rate cuts and emergency Federal Reserve loans to prevent credit from freezing up completely) the current market situation is still “far from normal.”

Today, Merrill Lynch announced that starting June 1, it will require its financial advisers to rate at least 20% of all stocks as ’sell’ as opposed to the 12% rated that way now. That is a huge step for an investment bank whose symbol is a raging bull, but remarkably, 20% is still an overly optimistic number. When Merrill investigated the performance of stocks in the MSCI world index and the US Standard & Poor’s index, it found that between the years of 1997 and 2007, somewhere around 37% to 40% of its recommended stocks lost money. Did it advise its own clients of this fact? Well, not exactly. But it decided to do it today.

What Merrill and other investment banks and brokerage houses are now facing is a huge crisis of confidence on the part of consumers. it seems we have ‘trust’ issues with these guys, and for good reason.

Banks and brokerage houses exert lots of pressure on employees to make big money over short periods of time to pump up their quarterly results. The result has been a delusional pool of salespeople who seem to have no grounding in any kind of reality whatsoever. Why? Are they just insanely happy in an over-medicated way due to their own personal failings and personality quirks? Or is it more the case that, by requiring them to push stocks no one should buy or hold stocks any sane person would sell, the policies of the investment houses themselves have created this mess?

As Michael Douglas shouted in the famous movie Wall Street, “Greed is good!”

I think what we are about to see, slowly but surely, are some splashy announcements of self-regulation by major investment banks and brokerage houses, with Merrill leading the pack as of today. Why? Because if they don’t do this, and do it loudly and with expressions of genuine concern (practice it in the mirror guys, you can do it), then sometime after this coming November they know they will be looking at the ‘R’ word.

I’m not talking about ‘recession’. (That ‘r’ word is so last-week’s-news on Wall Street.)

I’m talking about REGULATION.

AAAAARRRRGH! Run for your lives! The Democrats are coming!

Yesterday the leader of the world’s largest bond fund, Mohamed El-Erian of the global firm Pimco, announced that US policy makers “do not have good policy tools to deal with the destabilizing combination of asset price deflation and goods inflation.” In other words, the Fed can’t save us; something Bernanke knows but doesn’t want to say out loud. El-Erian continued, “This comes at a time when regulators are trying to play catch-up with a financial system that has morphed into something that does not fit neatly into existing frameworks and mindsets.”

No real news there, I mean, of course. You’d have to be in a coma not to notice. But then El-Erian dropped the real bomb,

“The longer the delay out of Washington, D.C., in implementing fiscal measures to stabilize the housing sector, the greater the risk that the higher collateral damage on Main Street will induce a politically driven regulatory over-reaction with unpredictable economic outcomes.”

I think this is absolutely on target. And we aren’t exactly seeing Congress move with lightening speed on this. The current bill designed to allow FHA to refinance homeowners facing foreclosure is facing a Bush veto, but more problematic is the fact that even if passed it would require lenders to voluntarily eat 30% of the bad debt on homes about to be foreclosed.

So far, mortgage lenders have been loathe to do this on their own, preferring instead to go through with the foreclosure, then buy the house back for pennies on the dollar themselves, thereby making their books look better. In other words, more smoke and mirrors. It is unclear how the new bill in Congress, even if it were passed (which it looks like it won’t be) could compel them to do something they’ve refused to do all along.

The truth is, regulation is almost certainly the right response. Will we see it? That depends on quite a few nebulous ‘if’s, ands, and buts’ that will likely not play out until after the next Presidential election.

Will Democrats get a better majority in Congress? They will need it to pass financial industry regulatory measures. Will the economy collapse so badly by then that we have much bigger problems than banking regulation? That could happen too. Will huge financial firms regulate themselves to head off the kind of sledge hammer approach El-Erian fears? Hard to say.

Stay tuned. You will almost certainly not be bored.