$$$ "Paying $11 million to never hear from your father-in-law again is a great deal"-- Steve Schwarzman [NG]

$$$ Fannie, Freddie and the Low-Risk-Investment Myth [Deal Journal]

$$$ Free coffee from Portfolio tomorrow at 30 Wall Street from 7-10 am.

$$$ An Interest Rate What? [Crossing Wall Street]

If you're thinking that now might be a good time to get off Wall Street and lay low by applying to business school, you aren't alone. Applications to business schools are booming. "It's the second-largest year-over-year surge in applications to full-time programs since 2002, and the highest level of increase in five years," Business Week reports.

The sharpest increase is in mid-tier business schools. Penn State's Smeal College of Business, saw a 39% increase in applications, for instance. But even MIT's Sloan School of Management and NYU's Stern School of Business saw double digit increases in application volume.

Sagging Economy Boosting B-School Programs [Business Week]

"Rob Levin has touched virtually every part of this company," CEO Dan Mudd said.

Fannie Mae CEO Dan Mudd Announces Management Restructuring to Drive Capital Management and Credit Loss Reduction Plan [Fannie Mae]

We've always wanted to be friends with Blackstone co-founder Pete Peterson because he's sure to have some side-splitting tales about watching Steve Schwarzman try to masturbate and/or sleep in a water bed, two activities which, anatomically speaking, are damn near impossible for SS to do. The whole him being loaded thing was secondary, and besides, who's to say he's not one of those super cheap billionaires who insists on dividing up the bill according to what each person ate when out to dinner with friends? Recent news, apparently. The Observer's Max Abelson reports that Peterson just bought his pal Leslie Gelb a little apartment on East 69th Street and there was nothing in it for PP. Wasn't anything too flashy, just a $3,040,000 co-op, but he knew living in squalor would make Gelb and the family happy.

"It's perfect for them," Mr. Peterson said. "It's not a large apartment--has kind of a small dinning room and a small living room, and I don't know whether there are two bedrooms or three but they're rather small. ... What I really like is that they like it."

What a Mensch! Pete Peterson Buys Pal Les Gelb a $3 M. Co-op [The Observer]

New Wachovia CEO Robert Steel vowed to turn things around at the bank and he was not kidding. He started with morale boosting pep rallies and marshmallow tower building competitions, and now he's moved on to a not even necessary capital raise that, while probably dilutive to current shareholders, is sure to wow the crowds with Bobby's out of the box thinking, no doubt honed during his time at Goldman Sachs.

Florida-based BankUnited Financial Corp (huge in the option ARM biz in South FL) is down 83 percent YTD. The Office of Thrift Supervision, it's hilariously named regulator, may lower its capital rating. The humidity in Miami is unbearable this time of year. All signs point to fail. David Bishop, however, refuses to come out and say it. The Stifel Nicolaus analyst instead downgraded the firm to sell and danced around the whole thing, writing that the "viability of the bank is increasingly fraying...[and while it] may yet be successful in finding private equity capital to forestall additional regulatory sanctions, we believe there is a good enough chance that this will not come to pass." It's unclear whether Bishop has a longstanding history of not JUST SAYING IT: YOU WILL FAIL, or if his skittishness is a recent phenomenon having something to do with the bank down the road suing everyone's favorite woodland creature for having the pair to do just that.

Related: BankAtlantic Sues Bové

Stifel cuts BankUnited to sell on capital concerns [Reuters]

The topic: FNM and FRE merger. And: Should Bernanke shave it off?

*PLEASE NOTE: In case you did not get it from the headline, this is a rumor. Our sources, while credible, aren't even sure it's true. They received it as a rumor and we pass it on to you as the same. It could be totally false, it could be totally true. Who knows? It's all relative.

**Except for the bit about Bernanke. That debate is actually happening.

Sovereign Bank, which is based in Philadelphia, recently sent out a letter to customers disclosing that the bank owns large amounts of preferred stock issued by Fannie Mae and Freddie Mac. At least one customer in New Jersey reacted to the letter by running to the bank and withdrawing her deposits. We know this because we overheard her tell her friends this story in a barber shop this morning.

Even without sparking bank runs, the shares of many regional banks are suffering because of the risk that they will have to writedown their holdings of Fannie and Freddie preferred. Felix Salmon at Portfolio asks the obvious question: "what on earth were these regional banks doing holding the GSEs' preferred stock in the first place?"

It turns out that banking regulations and tax rules encouraged banks to buy Freddie and Fannie preferred stock. Regulators require to banks to maintain a capital cushion against losses on loans. This capital requirement can be met by holding cash or cash equivalents and certain investments that were considered relatively risk-free. The preferred stock of Fannie and Freddie was one of the highest yielding investments banks were allowed to hold to meet capital requirements, according to a person familiar with the matter.

Tax rules also made holding the preferred stock of Fannie and Freddie attractive. The tax code allows banks to exclude 70 percent of the dividends received on preferred stock from taxable income. The Fannie and Freddie preferred historically paid a high dividend, making this even more attractive.