I found this post to be very helpful in understanding the shortfalls of the current bailout. Here is a choice quote:
The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.
A better approach would be for the government to provide capital directly, in the form of a “super-bond,” in an amount no greater than the debt to bondholders. The “super-bond” would be subordinate to customer liabilities, so it could be counted as capital for the purpose of capital requirements, and would be seen by customers as a legitimate cushion of protection. However, in the event of bankruptcy, it would have a senior claim in front of both stockholders and even senior bondholders. Do that, and you've actually got a mechanism to protect the financial system while at the same time protecting customers and taxpayers. Ideally, the super-bond accrues a relatively high rate of interest so that financials have an incentive to shift to private financing as soon as possible, but you would also defer the interest until the bank meets a minimal level of profitability to make sure that the financing doesn't strain the institution's liquidity.
But then, Congress didn't do this because nobody thinks in terms of balance sheets. So after a nice pop to maybe 1300 or even 1400 on the S&P 500, we can expect all hell to break loose again.
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