I don't understand what you're saying. Are you saying Paulson should just start buying stuff without any kind of detailed strategic plan and without any political preparation? Like an impulse shopper at a mall with $700 billion in his pocket?

Do you have any actual evidence that Paulson and Kashkari are not moving very quickly to put a plan in place? To what drama are refering? Do you think Paulson should just start making off the cuff statements about his present inclinations and possible actions before the decisions have been taken, so the already frenetic market can start running even more wildly back and forth on every word, as they try to guess who the winners will be?

There are lots of troubled financial institutions out there. If you want the government to inject capital directly and take equity shares, then you are asking them to pick winners and losers. Some banks will be selected for salvation, and make it through and survive, while some will be designated for failure.

Fine. But it seems that means some banks and their branches will close, or be absorbed into other banks after massive downsizing, and many of their employees will lose their jobs. That's life I guess. But this is the sort of thing that should be decided on a whim?

For a guy who thinks there is no crisis you seem to be in an awful hurry. Personally, given that the government is going to be spending $700 of our money, I would prefer they get it right. We only have one shot at this.

Ellen is right. The banks do have the Fed, and other central banks as well, over a barrel and not just because of FDIC.

Countrywide, Bear Stearns, Lehman, Goldman, Morgan Stanley, Merrill Lynch, Barclays, USB along with a few others are/were members of a very exclusive club -- Primary Dealers aka market makers in government securities. As such they are required to bid at Treasury auctions, guarantee liquidity in the government securities market and assist in implementing monetary policy. If the Primary Dealers are unable or unwilling to fulfill their obligations then Bernanke and Paulson really are over a barrel.

Here is the FRB's current Primary Dealer list.

Here are a few other sources on Primary Dealers.

Primary Dealers – Wikipedia

Bank of England handbook (pdf)

IMF Working Paper (pdf)

It is really amazing what you can learn in a few days on the internets, isn't it.

Dean,

Yes, I'm sure Paulson has a reasonably good understanding of the financials at the major firms. But that doesn't convert automatically into a well-coordinated strategic plan. Now, Reed Hundt would point out that they began drawing up the bailout plan during the summer. So why can't they jump right in, he asks. Shouldn't that plan have been in place and ready to go?

This seems unrealistic to me. The ground has been constantly shifting. As recently August 30th, Lehman Brothers was still in business; Merrill Lynch hadn’t been sold to Bank of America; the Fed hadn’t taken over AIG; Goldman Sachs and Morgan Stanley were still investment banks; Washington Mutual was still in business; Wachovia hadn’t been acquired. Any plan drawn up in August probably would have had action items related to each of those major companies, and is now moot.

And that's just in America. Notice that our own Democratic candidate, Barack Obama, has sensibly endorsed and emphasized the world-wide, multi-partisan calls for a unified global approach to what is indeed a global crisis. When Treasury began work on the bailout plan, Bradford & Bingley hadn’t been rescued; Fortis hadn’t been partially nationalized; Iceland’s major banks hadn’t been nationalized and the country of Iceland itself wasn't close to failure; Ireland hadn’t guaranteed the deposits of six major banks. Far east banks in Japan and Hong Kong hadn't pumped money into their own failing banks.
The UK hadn’t yet taken the steps it has taken in the past few days.

So presumably part of what Paulson and Kashkari are doing right now is conferring with global financial and governmental capitals to devise a coordinated strategy for putting the capital in the places where it is likely to prove most effective, and make sure they neither redundantly duplicate each other's efforts or undermine each other's efforts.

They also need a political and public relations strategy. Everybody is watching keenly to see what they do, and each action they take will have both market consequences and political consequences. Once investors get a clear indication of who the chosen winners are, or how the treasury money is going to be spent, they are going to be racing out of some investments and into others. Some banks will probably still fail; some people will panic or protest; some governments will have to rush in with more guarantees or to freeze withdrawals, or to pass emergency public spending and investment programs. The likely effects of publicly announced actions have to be anticipated, to the greatest extent possible, so the actions can be appropriately sequenced, and presented with some measure of political tact. Key opinion leaders around the world and in both parties here in the US need to be given heads ups so they can be prepared to deal with the shit when it hits the fan.

What is going on right now, it seems to me, is nothing less than a radical restructuring of the global financial system. It requires coordination and planning in numerous capitals. I just don't think it as is straightforward and simple as you are making it sound.

Yes, I'm sure Paulson has a reasonably good understanding of the financials at the major firms.

And I'm equally confident that he doesn't.

Do you really believe he had a "reasonably good understanding" of the size and extent of Lehman's unsecured debt?

This recap of yesterday's Treasury auction provides a clue that dealers do have Paulson/Bernanke over a barrel.

From Across the Curve

The auction of the May 2015 issue was an amazing occurrence. The Treasury gave the dealer community about an hour to underwrite $10 billion of supply. That was a big mistake. I always kid that in the underwriting process it is the job of the dealer community to shoot the taxpayer in the big toe. In this instance they amputated a leg instead.

...
I am told by participants [in the May 2015 issue] that the 3.31 percent yield was 40 basis points cheap to the level which prevailed in the market prior to the auction. The point is that in order to rustle up the $10 billion of bids to clear the $10 billion auction the Treasury had to reach 40 basis points from market levels.

In bond market jargon that 40 basis points is known as a “tail” or the number of basis points from where the issue was to the level at which it stopped.... A typical “sloppy” auction might “tail” 2 basis points. There are 5 basis point tails and I can recall 10 basis points and even 15 basis point tails. They are rare. Extremely. In all my years I can not recall a 40 basis point tail and shall proclaim this the record holder.

Now to place that in dollars and sense terms... it cost the taxpayers [$240,000,000]...to underwrite the auction today.

There are three more of these coming in rapid succession. Each will be priced at the new expensive for the taxpayer levels.

You would think a community lobbying for a bailout from taxpayers would have been content with shooting a big toe.