Barry Ritholtz is reporting that Morgan Stanley has frozen hiring at its investment banking division, because of, “low trading and underwirting volume.”

Additionally, the midsized investment bank Jefferies and Company is reporting that it had its worst quarter since last year.

If Jefferies does not ring a bell, there was a spate of stories about them a few months ago lauding how they avoided any damage from the financial meltdown because of their prudence and probity.

What we are seeing here is the slow unwinding of the Geithner/Obama bank bailout, which basically consists of extend and pretend, with the hope that banks will generate enough profits to eventually fill the holes in the balance sheets.

It’s why Geithner has actively fought against transparency in accounting and limits on executive compensation: He is afraid that someone who knows where the bodies are buried will take the whole rotten system down.

The problem with his solution is two fold:

• There simply ISN’T enough money to allow them to fill their balance sheet hole. I don’t mean that they don’t have enough money, I mean that the whole f%$#ing world as well as Mars and most of Jupiter do not have enough money.
• The banksters had no intention of rebuilding their balance sheets, they just continued looting, because they make their money this year from this.

What is going on now is that banks like Morgan Stanley are running out of suckers, who are increasingly realizing that they are just being taken, and banks like Jefferies are running out legitimate knowledgeable customers, because these customers are coming to realizing that, with the exit of the rubes, cash is going to be in very short supply.

If I am right, and I think that I am, when the sh%$ hits the fan this time, they won’t be able to panic congress into another TARP, and the Fed will be constrained by both its own hawks as well as the lack of buy in from the Congress, which will limit the legitimacy of any actions that they take.

It will be ugly, even if the next collapse is not as bad as Lehman, because there is much less capacity to accommodate such a shock.