Elsewhere = on my TPM blog and in re Krugman blog http://tpmcafe.talkingpointsmemo.com/talk/blogs/eds/2009/02/is-geithner-already-over-lever.php but my comment in re K didn't seem to get posted.

The other part was covered in the discussion with Merrill. Merrill gave the example of a BBB bond which becomes AAA when insured. That affects its price and yield, whether AAA or just better than junk. Now if a toxic asset has insurance, its price should be higher than if it doesn't have i. But 1) insurance is not perfect, 2) insurers are not perfect (some insurance will not pay off -- unless rescued by the government ala AIG), and 3) some insurance was written on behalf of third parties who have no material interest in what was insured (side bets).

#3 policies can be considered assets, "virtual assets" I believe Merrill said. My initial position is that they should not be "rescued", they are gambling debts at best.

#2 is apparently what drove Paulson to rescue AIG, in favor of Goldman Sachs to the tune of $20B. It is plausible that GS partially isolated itself from the mortgage market staring in April 2007 in part by sucking AIG and others into its bad investments. This may or may not have been crooked (AIG was a "big boy" and should have done its own due diligence, regardless of whether GS distorted the picture itself). But I am generally against bailing out GS for such things. Let AIG as a counterparty renege on GS contracts and work it out in court.

I have not seen a detailed outline of the "stress test" as proposed for the current situation. But if regulatory changes can help keep the losses "private" instead of socializing them, it sounds better than what Paulson was doing with loan guarantees to bad "big boys" who apparently were considered too big, and too bad, to allow them to fail.