The US Treasury under "ramblin' Hank" Paulson is pushing Congress for essentially a taxpayer-funded blank check (of at least $700 billion) to fund a Troubled Asset Relief Plan (TARP) already dubbed by some like economist Paul Krugman as "trash for cash".
If the experience of Japan is any guide, the US could end up spending enough money (and causing sufficient government deficits) for the US to lose its triple A sovereign credit rating, and trashing the US dollar if the program is not executed properly. Already, both domestic and foreign financial instutions of every stripe are lobbying for the right to slough at the government trough, while the necessity for Congressional approval opens the door for all sorts of political geremandering that could seriously dilute the original purpose of TARP. Moreover, while ramblin' Hank may be up to the task of riding herd over the motley crew that would administer TARP, there is no guarantee his successor will, nor that Congress can maintain the political will to see the program to completion.
Japan's sovereign debt was eventually downgraded from its triple A rating because of the mountain of debt incurred trying to avoid a depression in Japan's economy with indiscriminate spending that rapidly ballooned Japan's national debt, but did not directly address the root of the bad debt (NPL) problem.
The first priority is, as the US Treasury insists, to get a manisfestation of political will from the Congress by getting them to sign off on TARP. Without this approval, the financial markets will continue to exert pressure on financial firms already under stress, regardless of short selling restrictions.
The “Capitalist System” Always Seems to Prevail
In typical “law of the jungle” fashion, Wall Street competitor carnivores not only stood back and just watched as Lehman Brothers and AIG gasped their last breath, they were actually accelerating the process by heavily shorting these comanies' stocks, or aiding and abetting those (such as hedge funds) that were. Once bankrupt (in Lehman's case), the carnivores jumped on the still twitching carcass, picking over the pieces they were interested in buying. Barclays is reported going for Lehman’s US business, while Barclays, Standard Chartered and Nomura were looking at the European business, while Nomura outbid other banks for Lehman’s Asian business. Japan’s Mitsubishi UFJ Financial Group also moved to invest some 20% in Morgan Stanley after the smoke had cleared and the US government O.K.’d their conversion into a commercial bank holding company.
In addition, private equity firms as well as pension fund managers like Pimco are still interested in distressed mortgage assets, for the right price and ostensibly without the unmeasurable risk.
Thus, as long as the government makes it clear that it is the market liquidity provider of last resort to all major players, impaired assets and “toxic” debt vehicles will eventually find a market price at which trades will clear. The tricky part will be buying troubled assets from financial institutions while they are still going concerns. In Japan’s case, the FSA and the government finally came to the conclusion that essentially all major financial institutions needed a capital boost, coerced them into selling preferred stock in lieu of capital infusions, and required that they present the FSA with competent restructuring plans through which they ostensibly would be able to repay the government. At the end of the day, the Japanese government mostly made money with these investments in bank equity, and it is likely the US government can also make money on their “investment” once the financial system is stabilized and the economy begins to recover.