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JPMorgan Chase & Co. announced last night that it has acquired all deposits, assets, and certain liabilities of Washington Mutual’s banking operations from the Federal Deposit Insurance Corporation (FDIC) for $1.9 billion. The acquisition creates the country's largest depository institution, with over $900 billion in customer deposits.

Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC was named receiver. “WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” said Sheila C. Bair, FDIC chairman. Bair said the deal was simply a “combination of two banks,” and would be a seamless transition for customers.

Seattle-based Washington Mutual had been the largest savings and loan in the nation, and now represents the largest single bank failure in U.S. history. The bank, which has been hampered by billions in bad mortgage debt, had reportedly been searching for a buyer for some weeks now. You may recall that shortly after the collapse of IndyMac Bank, DSNews.com covered a report by banking analyst Richard X. Bove, in which Bove claimed Washington Mutual was teetering on the “danger zone” of failure.

Excluded from yesterday's transaction are the senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual’s banks. JPMorgan Chase will not acquire any assets or liabilities of Washington Mutual's parent holding company or the holding company’s non-bank subsidiaries.

The acquisition expands Chase’s consumer branch network into California, Florida, Washington, Georgia, Idaho, Nevada, and Oregon. The combined 5,400 branches in 23 states creates the nation's second largest branch network, with locations reaching 42 percent of the U.S. population, JPMorgan said.

According to a press statement released by JPMorgan, the acquisition of Washington Mutual’s banking operations is expected to be immediately accretive to earnings and to add more than 50 cents per share in 2009. The bank said it plans to complete most systems integrations and rebranding by year-end 2010, closing less than 10 percent of branches in the combined network in overlapping markets.

In addition, JPMorgan Chase plans to mark down the acquired loan portfolio by approximately $31 billion, which represents its estimate of remaining credit losses related to the impaired loans.

“This deal makes excellent strategic sense for our company and our shareholders,” said Jamie Dimon, chairman and CEO of JPMorgan Chase. “As we have said in the past, increasing our regional banking presence not only strengthens our retail business, but also benefits other business lines across our firm, including our commercial banking, business banking, credit card, and asset management groups,”

Top U.S. financial institutions tried harder in the second quarter to modify problem loans, according to a recent report by federal agencies. The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) have issued a joint mortgage metrics report, in which they found that actions by national banks and thrifts to prevent home mortgage foreclosures increased faster than their new foreclosures during the second quarter of 2008, despite an overall decline in mortgage credit quality.

Lenders modified 112,353 first-lien mortgages, an increase of 56 percent from the previous quarter, according to OCC and OTS data. Meanwhile, new foreclosures rose to 288,740 in the second quarter, from 278,857 the previous quarter.

The combined report, which replaces separate studies by the two agencies, represents approximately 60 percent of all mortgages outstanding in the United States. At the end of the second quarter, the 14 national banks and thrifts covered in the report serviced more than 34.7 million first-lien mortgage loans, totaling $6.1 trillion.

“As banks continue to work through this portion of the credit cycle, we are watching closely to ensure they have safe and sound risk management strategies in place,” said Comptroller of the Currency John C. Dugan. “Producing this report jointly with the OTS helps to provide a more transparent and systemic view of mortgage performance within federally regulated banks and thrifts to examiners and the public.”

OTS Director John Reich pointed to the increase in foreclosure prevention actions as a positive development. “This joint report provides valuable insights never previously available. It shows that the trend is definitely moving in the right direction to minimize the number of avoidable foreclosures and keep more Americans in their homes,” Reich said. “As we move through this downturn in the housing market, I encourage our institutions to continue these efforts.”

From January to June 2008, new loan modifications increased by more than 80 percent, while new payment plans grew by 8 percent, according to the report. The two types of loss mitigation actions reached more than 90,000 in June alone.

During the same period, the number of new foreclosures ranged from a low of nearly 92,000 in March to a high of more than 99,000 in May, before declining to about 96,000 in June, the report showed.

Other key findings in the OCC-OTS report included:

- New loss mitigation actions (loan modifications and payment plans) relative to new foreclosures averaged more than 87 percent during the second quarter, about 12 percentage points higher than during the first quarter.

- More than nine out of 10 mortgages remained current. However, credit quality declined during the quarter across all risk categories.

- There were increases in early stage delinquencies (30-59 days past due) and seriously delinquent mortgages (60 or more days past due, plus loans to bankrupt borrowers who are 30 or more days past due).

To view a copy of the agencies' full mortgage metrics report, click here.

The financial system is dealing with the worst housing meltdown since the Great Depression and is fending off an extraordinary number of body blows: the Bear Stearns debacle, the IndyMac bank failure, the takeover of Fannie Mae and Freddie Mac, the Lehman Bros. bankruptcy and the government's bailout of American Insurance Group.

The events of the past few days and months have many people reeling. My e-mail inbox and the MSN Money message boards have been flooded with readers' questions about the financial crisis.

Here are answers to some of those questions.

How can I tell if my bank will fail?

The short answer: You can't. The Federal Deposit Insurance Corp. doesn't publicize the names of banks on its "problem list." According to the American Bankers Association, most banks on the list recover and return to profitability without intervention.

 

Ratings services such as Bankrate.com's Safe and Sound system and TheStreet.com Ratings try to measure the relative strength of the nation's financial institutions. Some troubled banks recover, while others plunge quickly into insolvency. For more, see "What if your bank is seized?"

If my bank fails, will I still have access to my money?

If you're at the gas pump trying to use a debit card, for instance, will it just not work one day?

 

You'll most likely have uninterrupted access to your accounts even as your money is transferred to a new bank.

Regulators usually shut down failed banks on Fridays. The FDIC then works all weekend to transfer insured deposits and most of the bank's assets to the bank that's taking over the business, or to a new entity created for just this purpose. (IndyMac Bank's insured deposits and assets were transferred to the newly chartered IndyMac Federal Bank.)

In the rare event that the FDIC couldn't find a buyer and a new bank were not created, then the bank would shut down and you'd be without access to your money for a few days. Debit cards and ATMs would not work, and checks that hadn't cleared would be returned with a "bank closed" notation. On the Monday after the closure, the FDIC would begin sending checks to customers for the amount of their insured deposits.

Are credit unions insured the same way?

All federally chartered and most state-chartered credit unions are insured by the National Credit Union Share Insurance Fund, which is a federal fund that is backed -- like the FDIC -- by the full faith and credit of the U.S. government. The share-insurance fund is an arm of the National Credit Union Administration, a federal agency. To see whether your credit union is covered, click here.

 

Funds in these credit unions are insured to the same amounts as FDIC-insured accounts: $100,000 per depositor per credit union, with up to $250,000 coverage for certain retirement accounts.

A few state-chartered credit unions are not covered by the NCUSIF but instead get coverage from private insurers, such as American Share Insurance, which are not insured or backed by the U.S. government.

Investment accounts, even those purchased through bank branches, aren't covered by the FDIC.

 

They are, however, typically covered by the Securities Investor Protection Corp., which provides up to $500,000 per customer to restore funds to investors with assets in bankrupt or troubled brokerage firms.

• Talk back: Is America in permanent decline?

The SIPC's protection is limited, however. You're not protected against swings in the market, investment losses or investment fraud.

To be covered, your brokerage needs to be an SIPC member. To check, visit the SIPC Web site or call -202-371-8300.

Should I bail out of the stock market?

If you already have all the money you're ever going to need, sure.

 

If you're like most of us, though, you're still working toward financial independence, and you need the long-term returns of the stock market to get there. In the long run, stocks perform better than any other investment -- but you may have to weather times like these once in awhile.

Even if you're in retirement, financial planners will typically tell you to keep at least 50% of your assets in stocks and stock mutual funds to overcome inflation's effects and ensure you don't run out of money.

Are money market funds still safe?

On Oct. 17, we got the disturbing news that one of the nation's oldest money market funds "broke the buck," or allowed its share price to dip below $1. The $65 billion Reserve Primary Fund held $785 million in short-term obligations from Lehman Bros., which has filed for bankruptcy, making those investments worthless.

 

This is a big deal because money markets have been touted as super-safe places to park your cash. In the past, mutual fund companies rushed to inject their own money if the value of their investments dropped far enough to threaten the sacred $1-a-share mark.

If you've got cash in a money market fund that you'll need within the next couple of years and you're concerned, you can consider transferring it to an FDIC-insured bank. Just pay attention to the FDIC insurance limits -- typically $100,000 per depositor per bank.

MSN Money columnist Jim Jubak predicted a year ago that this would happen, by the way. So did MSN Money columnist Jon Markman, in "Your 'safe' money isn't so safe." You should start reading these guys if you don't already.

I have an insurance policy with AIG. Am I still covered?

Yes. AIG's insurance businesses are still solvent, according to regulators. The company ran into trouble in other areas, specifically by selling contracts meant to protect buyers against defaults on a variety of assets, including mortgage loans. As mortgages went bad and housing values plunged, so did the value of these contracts, which helped lead to the company's $18 billion loss.

 

Even if AIG were to slip into insolvency, every state has guaranty associations that ensure policyholders continue to receive some level of coverage. Although limits differ, most states offer up to:

• $300,000 in life insurance death benefits.

 

• $100,000 in cash surrender or withdrawal value for life insurance.

 

• $100,000 in withdrawal and cash values for annuities.

 

• $100,000 in health insurance policy benefits.

 

Property insurance guaranty funds, which step in for insolvent homeowners or auto insurers, pay out the policy's limits or $300,000, whichever is less.

You always want to monitor the strength of your insurer, as its ability to pay out claims in excess of the guaranty amounts may be at stake.

 

Several companies rate insurers, including A.M. Best, Moody's and Standard & Poor's. Insure.com offers an interactive tool to check S&P ratings.

If you want to switch to another insurer, your options may be many -- or nonexistent. You typically can transfer annuity money from one company to another in what's known as a 1035 exchange without triggering taxes, although you may owe surrender charges.

If you have a life or health insurance policy and your health has deteriorated, however, you could find getting new coverage difficult.

Credit card issuers are cozying up to folks they consider good risks while trying to limit the damage that can be done by people they consider bad risks.

 

That's why borrowers with mediocre and worse credit scores are finding their credit limits being reduced and their interest rates raised, while those with good scores continue to enjoy excellent access to most forms of credit.

• Talk back: Is America in permanent decline?

Mortgage lending is somewhat of an exception. You'll still have far more options if you have good scores, but you may also need a bigger down payment (or more equity, if you're refinancing) than you have in the past. (See "How to wow your mortgage lender.")

What's going to happen next?

Nobody knows. Things could get worse, much worse or better.

 

If you feel like you simply must do something, though, consider contributing money to the American Red Cross. (See "How to give even when you're broke.") While we worry and fret about what might happen, the Red Cross is dealing with the aftermath of what has happened: Hurricane Ike. Open your wallet for someone else, and I'll make one rock-solid prediction: You're going to feel at least a little better.

FDIC Board to Consider Restoration Plan to Bolster the Deposit Insurance Fund

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $5.0 billion in the second quarter of 2008, a decline of $31.8 billion (86.5 percent) from the $36.8 billion that the industry earned in the second quarter of 2007. With the exception of the fourth quarter of last year, the latest earnings were the lowest for the industry since the fourth quarter of 1991.

"By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle," said FDIC Chairman Sheila C. Bair.

The FDIC's "problem list" grew to 117 institutions from 90 at the end of the first quarter. That is largest number on the list since the middle of 2003. Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from IndyMac Bank, F.S.B., Pasadena, CA, which failed in July. "More banks will come on the list as credit problems worsen," Chairman Bair added. "Assets of problem institutions also will continue to rise."

In releasing the latest results, the FDIC cited higher provisions for loan losses as the primary reason for the drop in industry profits. The size of the earnings decline was mainly attributable to a few large institutions, but more than half of all insured institutions (56.4 percent) reported lower net income in the second quarter. In addition, the industry reported lower noninterest income than a year earlier, reflecting continuing weakness in market-sensitive revenues, such as income from trading and securitization activities. Expenses for goodwill impairment and other charges to intangible assets were significantly higher than a year earlier. Proceeds from sales of securities and other assets yielded a net loss in the second quarter, compared to a net gain a year ago.

Chairman Bair also announced that in early October the FDIC will consider a plan to replenish the agency's Deposit Insurance Fund (DIF), which experienced a large drop due to added loss reserves for IndyMac and other bank failures. The DIF restoration plan "likely will include an increase in the premium rates that banks pay into the fund," she said. "And we'll be proposing changes to the current assessment system that will shift a greater share of any assessment increase onto institutions that engage in high-risk behavior to encourage and reward safer behavior."

Financial results for the second quarter are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Among the major findings:

Provisions for loan losses continue to be the main cause of falling earnings. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled $50.2 billion, more than four times the $11.4 billion the industry set aside in the second quarter of 2007. Almost a third of the industry's net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

Noncurrent loans are still rising sharply. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by $26.7 billion (20 percent) during the second quarter, following a $26.2 billion increase in the first quarter and a $27.0 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans and leases in the last three quarters consisted of real estate loans, but noncurrent levels have been rising in all major loan categories. At the end of June, 2.04 percent of all loans and leases were noncurrent, the highest level for the industry since 1993.

Assets of insured institutions declined. Total assets of FDIC-insured institutions declined during the quarter for the first time since 2002. The $68.6 billion (0.5 percent) decline was caused by a reduction in trading assets at a few large banks. Assets in trading accounts, which increased by $135.2 billion in the first quarter, declined by $118.9 billion (11.8 percent) in the second quarter. In addition, the industry's holdings of one- to four-family residential mortgage loans fell by $61.4 billion (2.8 percent). Real estate construction and development loans declined for the first time since 1997, falling by $5.4 billion (0.9 percent).

The FDIC's Deposit Insurance Fund reserve ratio fell. Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30th, the DIF balance fell to $45.2 billion at the end of the second quarter, down from $52.8 billion at the end of the first quarter. While insured deposits rose only 0.5 percent during the quarter, the decline in the fund balance caused the reserve ratio to fall to 1.01 percent as of June 30th from 1.19 percent one quarter earlier. Because the reserve ratio is now below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to no less than 1.15 percent within five years.

The complete Quarterly Banking Profile is available at http://www2.fdic.gov/qbp/index.asp on the FDIC Web site.

Double up on national health care, end greenhouse gases, fix bridges?

Wall Street's crisis is about to become Main Street's crisis, as bank credit freezes and loans dry up. The government's fix: $700 billion to buy up the bad loans choking the system.

It's a monster plan, but there's little choice, according to White House and Federal Reserve officials. Though much of the money may return to the nation's coffers over time as the treasury sells off the mortgage-backed assets it will purchase, the bailout will severely limit what the government can afford to spend on health care, energy, infrastructure and education in the years ahead.

Let's start with the nation's infrastructure. The American Society of Civil Engineers estimates our nation's bridges need $180 billion in repairs, with our rail infrastructure in need of $185 billion in maintenance. California wants to spend $40 billion for the nation's first high-speed rail network to connect southern and northern California.

Arizona Public Service, the state's public power utility, is currently building the nation's largest solar power array in the desert near Gila Bend, Ariz. It will be able to power 70,000 homes using only the sun's rays — and create thousands of high-tech green energy jobs to boot. Construction costs will be about $1 billion, but the utility says it will pay for itself in about seven years. The project covers just three square miles. With the $699 billion left over, you could put even more southwestern desert to work in creating clean energy.

Health care and climate change are other major concerns. Kenneth Thorpe, a professor of health policy at Emory University points out that for $150 billion you could provide every American with private health insurance and create a universal automated health-information system. When you consider that the National Cancer Institute receives $5 billion a year in funding, you could multiply its budget by 10 and provide private health care to every American.

McKinsey & Co., a consulting firm, estimates it will cost the U.S. economy $150 billion per year to stabilize greenhouse gases by 2030. For three years, $700 billion could pay for the cost of both health care plans (in case one doesn't work) and cover the cost to reduce carbon emissions.

Since global trade isn't going away any time soon and America's ports are getting increasingly crowded, using the money for port expansion might be a smart idea. According to the American Association of Port Authorities, container volumes at American ports have increased by 7 percent per year over the last 20 years, far outpacing capacity growth.

 National security is also a concern. After five years in Iraq, most estimates for the war's cost tally into the $500 billion range. Unlike investments in distressed assets, paying for the Iraq War won't produce a return, but $700 billion would stem the government's future debt obligations to its creditors.

Then there's education. The U.S. currently spends some $500 billion annually on public education, yet still finds itself slipping behind many other industrialized nations when it comes to giving the next generation the skills it needs to compete globally.

The difference, of course, is that government spending for any of this would require a massive tax increase, with no chance of getting any of the money back. The upside: At least it would be a sure bet.

Former Democratic presidential candidate and New York senator Hillary Rodham Clinton pushed Thursday for a wide-spread government purchase and modification of troubled mortgages in the name of protecting borrowers and restoring credit markets, according to an op-ed published in the Wall Street Journal.

Clinton, who along with most Deomcrats has long advocated so-called “affordability modifications,” said that the nation’s current financial crisis will not be solved until homeowners are kept in their homes. Read the full op-ed.

“The solutions we pursue cannot simply stabilize the markets,” she wrote. “We must also deal with the interconnected economic challenges that set the stage for this crisis — and reverse the failed policies that allowed a potential crisis to become a real one.”

The senator suggested that the government revive the Depression-era Home Owners’ Loan Corporation, a New Deal government agency which purchased mortgages from failed banks and modified terms to allow borrowers to keep their homes.

“The original HOLC returned a profit to the Treasury and saved one million homes,” Clinton said. “We can save roughly three times that many today.”

For those looking for a history lesson, the Home Owners’ Loan Act of 1933 created the HOLC. The government agency issued bonds to lenders in exchange for acquiring defaulted residential mortgages; the HOLC would then refinance the mortgages into a “sustainable” mortgage. At the time, mortgages were amortized over much shorter horizons, so in most cases the HOLC merely extended loans to fully amortized, longer-term loans — 20 to 25 years, similar to the 30-year mortgage commonly known in modern mortgage markets.

The idea was that lenders would at least have a marketable bond earning them interest, even if that interest was less than the mortgage; the option was clearly better than a non-performing asset. But some scholars have argued that what made the program work was a simple modification path for most troubled borrowers (i.e., simply lengthen the term) that didn’t put home prices at further risk of decline, and that no such simple path exists for many of today’s troubled borrowers.

Clinton’s op-ed didn’t delve into that sort of debate, of course; it spoke in general terms, as most politicians do. “If we do not take action to address the crisis facing borrowers, we’ll never solve the crisis facing lenders,” she said. “These problems go hand in hand.”

Congress is expected to pass some form of bailout package, including as-of-yet unknown provisions surrounding mortgage relief, sometime this weekend. But it’s clear that politicians are reaching back to the last great financial crisis our country has seen in a search for solutions.

Pressure continued to mount Thursday for troubled thrift Washington Mutual (WM: 1.69 -25.22%) as it remains under-the-gun to find a buyer, or reportedly face regulatory action. The thrift was reportedly considering a deal with private-equity buyers, according to a report Thursday morning in the Wall Street Journal.

WaMu’s exploration of potential money players willing to do a deal reportedly turned up Carlyle Group LLC and The Blackstone Group (BX: 16.60 -1.31%), according to sources that spoke with the Journal. The story suggested that the two firms would team with long-time bank investor Gerald J. Ford. In 2002, Ford made a small fortune selling Golden State Bancorp, a California thrift, to Citigroup Inc. (C: 19.41 +2.37%).

Speculation of a potential deal sent WaMu shares sky-rocketing early Thursday, up 12 percent to $2.65 immediately upon market open, but the buzz didn’t last; shares were at $1.70, down nearly 25 percent, when this story was published.

Earlier this week, a source close to the FDIC suggested to HW that regulators at the OTS were putting pressure on WaMu to find a deal before Friday of this week. “Either a deal gets done this week in the private market, or a deal will get done via the FDIC,” our source said. Such rumors about WaMu’s future, however, have been common in recent weeks.

Under such pressure and with no clear deal in the works yet, a split-sale is looking like an increasing possibility. That increasingly likely scenario led every major ratings agency to slash its ratings on the bank holding company earlier this week. See HW report.

Potential purchasers are likely to want to see an FDIC takeover of the bank, sources say, which would allow a purchaser to acquire branches and deposits — the “good” part of WaMu — while leaving the government to manage the liquidation of the more troublesome loan portfolio.

WaMu’s $231.1 billion loan portfolio includes $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit. Total nonperforming assets jumped to $11.2 billion at the end of the second quarter, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier.

“Washington Mutual Inc. is kind of like that milk in the refrigerator that’s a couple of days past its expiration date,” wrote David Weidner, editor at MarketWatch.  “It may be fine or have gone past the point of no return. Either way, it’s not long before it will be gone.”

As Congressional leaders debate the merits of a historic bailout proposal being pushed by the Bush administration, and Democrats look to tack their own social agenda to the back end of the proposal – free homes for everybody! – perhaps it’s time for all of us to admit something: this is a complex mess.

As someone well versed in both real estate finance and capital markets, and who is lucky enough to know some of the smart people that play in the distressed asset space, the truth is that we’re facing a mess that has many moving parts, and many known and unknown variables. Mortgages are a central cog, sure, but far from the only one.

With that in mind, I’ll admit something publicly few others will: how to solve this mess is anyone’s guess. Anyone suggesting they know precisely how to do it is either listening to their ego or missing a critical angle – or both.

All of that said, I do know one thing: for all of the myriad of factors that got us here, only one now matters, whether or not there is a government bailout. That factor? Pricing. And what we’re hearing from our leaders in this area has me very, very worried.

Both Fed chief Ben Bernanke and Treasury chief Henry Paulson have sought to sell their plan to Congress by suggesting a dichotomy between current “fire sale” prices and the long-term “fundamental value” of an asset; the argument is that a lack of market transparency and investor fear have driven the prices of whole loans and ABS/MBS/CDO issues to levels that no longer reflect their fundamental value.

The government, they say, will buy these assets at prices greater the current market is assigning them; the idea is that in so doing, balance sheets are freed, institutions are recapitalized, and pricing discovery takes place (which, in turn, is supposed to help the prices of ABS/MBS/CDO issues recover). And thus the lending machine starts anew.

Let me make something clear, outside of the academic debate now being used to sell this bailout: if any of this junk had value, it would be trading right now. And more importantly, the lack of trading activity has little to do with a need for “price discovery,” a term being bandied about inside the Beltway with reckless abandon this week.

There is an ugly truth that Paulson is choosing to keep to himself: most already know what the prices for these sort of assets are. The problem is that there isn’t a financial institution whose balance sheet can handle selling at those prices — at least, not without putting an entire business into the side of a canyon. This is the real reason assets are clogging up balance sheets at inflated values, or put into Level 3. Or the reason that whole loans are marked at a value that in no way reflects the price that loan would receive if it was sold.

Paulson & Co. are telling Congress that the government may break even or profit from this venture, but paying an above-market price for assets valued by the market at junk levels is the pretty much the definition of how to lose money in asset management. And gobs of it, too, far more than the $700 billion figure associated with this plan.

Further, tacking on provisions to force massive loan modifications is, in a perverse way, a great way to ensure huge losses for the taxpayer. I’ll save the technical analysis for another paper, but the bottom line is that wide-scale loan modifications to mortgages underlying a securitized pool generally has an adverse effect on capital structure and cashflows. And while aggressive loan modifications can be profitable on whole loan acquisitions, that profit comes from buying loans at justifiable prices, not some phantom estimate of “fundamental value.”

It appears that the goal of this plan is to recapitalize banks to stimulate lending again; and therein lies the second problem: what is “fundamental value,” anyway? Is it the value that can recapitalize a bank and ostensibly start lending again, which is higher than current marked value? Or is it marked value, which is still above the prices assigned to an asset by the market? Or something else?

Beyond all the questions around pricing, there is a more fundamental question that has yet to be asked: has the risk profile around lending shifted irrespective of capitalization? In other words, there is little guarantee that bailing out an ailing financial institution and clearing its bad assets off of its books at inflated values will stimulate the sort of lending activity policymakers are expecting.

Think of a drunk driver crashing his car; then think of the government providing a new car to that driver, hoping he’ll hit the sauce again, and not crash the car. Hardly seems to be the best use of what may end up being trillions of taxpayer dollars.

President George W. Bush urged swift approval of a historic Treasury proposal to bail out ailing financial institutions in a primetime address Wednesday. “Without immediate action … our country could experience a long and painful recession,” he said, urging support for a Treasury proposal unveiled last week.

The administration’s plan would place $700 billion at any one time into the hands of the Treasury to buy up troubled assets; the government could end up buying troubled assets totaling far more than that, however. It’s a price taxpayers must be willing to pay, however, Bush said. He backed his plea with dire warnings of savings and retirement losses, further home foreclosures and closed businesses affecting every U.S. citizen.

“With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all,” he said. Read his full remarks.

The President and his administration face an uphill battle to convince not only everyday American citizens and Congressional Democrats that their proposal is critically needed — but even rank-and-file GOP members, too. Sen. Richard Shelby, R- Ala. is one critical holdout, and spoke openly of his lack of confidence in the proposed bill to the Wall Street Journal on Wednesday.

Failure to act upon this plan, Bush said, will directly affect the everyday American. ”The market is not functioning properly. There’s been a widespread loss of confidence. And major sectors of America’s financial system are at risk of shutting down,” the president said, warning of “financial panic.”

The dire words come as the public is clearly leery that such a vast and far-reaching proposal is really needed: a WSJ/NBC poll found Wednesday that voters are evenly divided on the plan: 31 percent of voters approve the plan, while 33 percent disapprove and 28 percent have no opinion. Both the Democratic and Republican parties nearly mirrored the same approval/disapproval ratio, as well, while self-identified Independents registered the highest levels of disapproval — 45 percent said the opposed the plan.

Once such example of opposition is William Perkin III, even if he’s not exactly an “everyday American” in the traditional sense of the word. He turned a $1.25 million profit by going long on shares of Goldman Sachs Group Inc. (GS: 135.50 +1.88%) last week, betting the firm would turn the corner on its own merits; instead, the stock bumped on news that government would rescue Wall Street. Upset by a plan he told the Wall Street Journal that views as “representing the death of capitalism,” he has used his profits to take out advertisements attacking the bailout proposal.

Bush, however, defended his proposal as capitalist in Wednesday’s address. “Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised,” Bush argued, essentially taking the well-worn ’save capitalism from the capitalists’ stance.

Not everyone is convinced the government proposal will generate a loss for U.S. taxpayers. Bill Gross, the well-known chief investment officer of Pacific Investment Management Co. said this week in an op-ed published by the Washington Post that he believes Main Street will benefit from the bail out as well.

“The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic,” Gross wrote. The famed fund manager said he believes that the proposed bailout could yield 7 percent to 8 percent for taxpayers.

But profit was not the M.O. for the President in his speech; if anything, fear was. “Our economy is facing a moment of great challenge,” he said to close his remarks. “But we’ve overcome tough challenges before — and we will overcome this one.”

Discussions to hammer out the details of the Bush Administration's $700 billion financial sector bailout continue today on Capitol Hill. George W. Bush has invited both presidential nominees, Senator Barack Obama (D-Illinois) and Senator John McCain (R-Arizona), to take a break from their campaign trails and join in the debate in Washington, D.C. Thursday afternoon.

Lawmakers have managed to drum up bipartisan support to include two important measures in the bailout legislation. The new bill will establish an oversight committee to supervise Treasury Secretary Henry Paulson's dissemination and use of buyout funds. And although the Bush Administration originally said that the executives of those institutions helped should not have their salaries capped because it would discourage their cooperation, it has now agreed with Congress to limit executive compensation.

One crucial issue however, that legislators have not been able to agree upon is providing assistance to troubled homeowners in default or facing foreclosure, a problem at the root of the financial sector crisis. Earlier this week, 35 U.S. consumer, labor, and civil rights groups – including the Center for Responsible Lending, the Leadership Conference on Civil Rights, the National Community Reinvestment Coalition, and the National Fair Housing Alliance, among others – sent a joint letter to members of Congress, urging them to include court-supervised mortgage restructuring for American homeowners to allow them to save their homes. “Purchasing subprime and Alt-A private securities will not provide the government with any legal ability to modify loans and keep families in their homes, which is necessary to stop the crisis," the letter said.

The authors of the letter stated that for a year now, they have advocated Chapter 13 judicial modification relief as the most effective way, at no cost to taxpayers, to prevent foreclosures. According to Martin Eakes, CEO of the Center for Responsible Lending, 90 percent of the government's proposed securitization purchases will have utterly no impact on the underlying home loans. Eakes says that giving homeowners access to assistance through bankruptcy courts is the only solution that will actually make a real difference.

In its own letter to Congress, the Mortgage Bankers Association (MBA) said that it supports a quick passage of the bailout legislation, but “opposes adding unrelated proposals to the bill, primarily efforts to allow judges to alter residential mortgages in bankruptcy.” John Courson, COO of the MBA, said “We will continue to oppose efforts to give judges the authority to cram down legitimate mortgage debt.” Courson argues that the Bush Administration's rescue plan is not a mortgage or housing bill, and that lawmakers will be able to address these issues later, building on the work they've already done. Courson said that changing bankruptcy to include primary residence mortgage debt will raise the cost of credit and further destabilize the market.

Another sticking point in the language of the bailout bill is the payment schedule of the $700 billion. Congressional Democrats are arguing for structured installment payments to be administered over a set period of time of as much as two years.

Despite a clashing of views on these points, both Democrats and Republicans have expressed confidence that the rescue plan is moving forward and a bipartisan consensus could be reached as soon as first part of next week.

Last night, President Bush broke into network television programming with a live message to the American people, in which he stressed the necessity of an immediate rescue plan that committed $700 billion in taxpayer money. Although Bush took great pangs to explicitly explain what such a buyout would mean to the common taxpayer, his words did little to quell growing dissent, and even anger, from the general population. CNN reported from the heart of Montana today, that objections are flooding into Congress representatives' offices, a sentiment that is mirrored across the country. Protest rallies are reportedly being held in 130 cities today. CNN said the protests are a strong testament to Washington's extreme disconnect from its American constituents.