The business press goes wide with Microsoft backing away from its unsolicited bid for Yahoo, ending for the moment a pursuit that could have reconstituted Internet competition.

The Wall Street Journal, New York Times, and Financial Times all go above the fold with stories on the $44.5 billion bid’s collapse (Yahoo wanted another $8 billion or so). The Journal says “internal skepticism, outside opposition and his own rising doubts persuaded Microsoft CEO Steve Ballmer to walk away.”

The NYT says in a news analysis that Microsoft now must seek something other than a “quick fix” to cover its flank with the Internet—this time, unlike it’s squashing of Netscape in the 1990s, under the antitrust heat lamp. The paper says Ballmer decided not to make a hostile bid after a meeting in Portland, Oregon, two weeks ago with Yahoo CEO Jerry Yang, after which a Microsoft exec said “They are going to burn the furniture if we go hostile. They are going to destroy the place.”

The Journal:

Microsoft’s pursuit of Yahoo was among the latest moves in the scramble by technology and media companies to capture the flood of advertising dollars moving online and to block Web powerhouse Google Inc. from extending its dominance in online-search advertising

The NYT on C1 says Yahoo execs slapped high fives after Microsoft capitulated, but the papers note the company faces shareholder lawsuits for not taking Microsoft’s bid, which was nearly two-thirds more than the value of Yahoo’s shares when it was announced.

The WSJ posts a totally speculative piece on C1 that looks at past busted deals to suggest Microsoft might bid again.

The FT says the failed deal will “trigger fresh rounds of talks between some of the biggest players in the internet industry as both companies now look for other ways to boost their flagging online businesses.” Both it, the Journal on A12, and the San Jose Mercury News say Yahoo’s CEO faces pressure from skeptical shareholders and employees now that he’s succeeded in fending off the Seattle behemoth.

Bloomberg says the failure increases the pressure on Microsoft’s CEO to “make his money-losing Internet business succeed against Google.” The WSJ on A12 says his “challenge is stark,” given that trends are moving away from PC computing, which it dominates, and toward the Internet, which it doesn’t.

FBI digs deeper in mortgage biz

The NYT reports on its Business Day cover that the FBI and IRS are stepping up an investigation of the mortgage business—specifically whether some ignored obviously high income numbers reported by borrowers to get loans.

The Times says the new task force is “broader and deeper” than the investigation begun earlier this year into the foreclosure practices of more than fourteen firms in the mortgage industry.

The WSJ says on A4 that federal prosecutors in Brooklyn have formed a task force, as well, but it’s not clear from the stories how or if the two are related. It says the group will look at a variety of potential fraudulent activities. Prosecutors there are already looking investigating UBS, Bear Stearns, and American Home Mortgage Investment for fraud.

Are we South Korea, circa 1997?

The Journal in an A2 Outlook column says economic problems are just beginning even if the financial crisis may have peaked. This despite good news, relatively speaking, on Friday that the unemployment ticked down on job losses that were far fewer than expected.

The paper makes the case that unlike the past couple of financial crises, this one is based on fundamental economic problems—primarily overstretched consumers who have borrowed beyond their means and overinvested in housing. It compares the economic situation to Korea’s in 1997 when its unemployment rate more than doubled and it entered a downturn from which it hasn’t yet recovered.

This is a good piece of analysis, and we’ll quote the close at length (despite some editing snafus):

The risk for the U.S. is that weakness goes beyond the correction of housing excesses and begins to feed back into the financial system and then, again, hurts the wider economy.

By contrast, says Nouriel Roubini, an economist who heads RGE Monitor, a financial- and economic-forecasting service, the U.S. financial system has adjusted only to the losses on mortgage loans. He predicts that a wave of defaults on industrial loans, municipal bonds and consumer credit is coming, which will trigger another wave of financial-system distress.

Fed Chairman Ben Bernanke believes such feedback effects are what made the Great Depression great. Mr. Bernanke’s awareness of such risks is why he cut rates last week and, despite signaling a pause, is still focused on the risks that the U.S. economy may deteriorate further.

Buffett sees clearing skies

Warren Buffett became the latest—and most credible—expert to suggest that the worst threats of the financial crisis are largely past, crediting the Fed for preventing a widespread meltdown, the WSJ says on C1.

Bank losses “aren’t over by a long shot, but a lot of it has already been recognized,” he said, adding that the depth of the housing crisis, unemployment and other economic factors would help determine how long the write-downs continue.

“The idea of financial panic—that has been pretty much taken care of,” he said.

Bloomberg and the Journal report that Buffett blamed credit-rating firms like Moody’s and Standard & Poor’s for inflating ratings of subprime securities and bond insurers. He also said there’s no way the bond insurers like MBIA and Ambac Financial should still be rated AAA “if they borrow money at 14 percent or if their stock has dropped 95 percent.”

The Chicago Tribune quotes Buffett as saying “I don’t know of any CEO that wouldn’t do the job for half the pay they get, maybe a quarter.”

I believe in fourth-quarter earnings

The Journal on C1 says the market may be “setting itself up for failure” by betting too high on earnings later this year. It says expectations for the fourth quarter would make it the most profitable in history and dryly notes that:

Brian Belski, U.S. sector strategist at Merrill Lynch, says Wall Street stock analysts have a track record of being overly bullish about earnings rebounds amid economic downturns (and too bearish when earnings fall.)

Following the periods of declining earnings in 1991 and 2001, results four quarters after the trough of the downturn came in 50% below what had been expected when the economy was bottoming out, Mr. Belski notes.

Its Ahead of the Tape column, also on C1, sounds a similarly downbeat note. It calls the stock market’s performance of late into question, noting that the “economy’s performance hardly seems to justify such ebullience.”

You can’t eat the core index

The Tribune looks at the inflation game and how the government underestimates it by low-balling the impact of food and energy prices. Its headline neatly summarizes the cognitive dissonance: “Food, fuel costs climb, and key inflation measure drops.”

Here’s the Quote of the Day:

“It is reassuring to have the core index tame, but you can’t eat on the core index. You can’t drive on the core index,” said Bill Hummer, chief economist at Wayne Hummer Investments in Chicago. “You can’t ignore what’s going on in food and energy.”

The paper quotes an analyst who says inflation is running at an annual rate of more like 10 percent, rather than the 4 percent the government says, primarily because of increases in “consumer essentials.” Why would they do that? The Trib doesn’t attempt to answer, but this may help.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.