Bharat Rakshak

Acharya wrote:
http://www.progressivehistorians.com/20 ... ntons.html

The two key questions that need to be asked are:
1) If Bill Clinton had not repealed Glass-Steagall would the current crisis not have occurred or been less severe? and,
2) Do we need to bring back Glass-Steagall? To understand the answers to both questions you need to know exactly what Glass-Steagall prohibited and how the bill that repealed it changed those prohibitions. In short, You need to know a bit of history.

Carter Glass, that old foe of banks entering into the stock market insured that the Banking Act of 1933 contained four key provisions:

* Section 16 - restricted commercial national banks from engaging in most investment banking;

* Section 20 - prohibited any member bank from affiliating in specific ways with an investment bank;

* Section 21 - restricted investment banks from engaging in any commercial banking; and

* Section 32 - prohibited investment bank directors, officers, employees, or principals from serving in those capacities at a commercial member bank of the Federal Reserve System.

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999), is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services. Other major mergers in the financial sector had already taken place such as the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation combination in the mid-1990s. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Acts by combining insurance and securities companies, if not for a temporary waiver process [1]. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobber’s pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.

Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Today’s broker-dealers have no skin in the game – they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.

The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchant’s compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.

It’s difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bank’s balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directors’ service agreements – with generous severance terms – and joint and several liability.

Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.

Nationalisation of losses?

In his later article on March 11, 2008, Wolf says, “The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.” Nationalisation? And of losses? In free market US, which pontificates on privatisation of public sector and government works the world-over?

But how to nationalise only losses? To keep the ownership with those who lost others’ money? Roubini also says that some market observers are already talking about nationalisation of the US banking system — first covert and then explicit — as the next step to the financial meltdown.

Obviously the US Government is seen as the saviour for the faltering — or better, collapsing? — financial market of the US. So, massive state penetration of Wall Street seems inevitable. And it is already happening. And that will be a topic by itself.

QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital ’C’? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. It’s obvious.

SwamyG wrote:Some more 101 stuff for inquisitive minds:
How We Got Here: It's Housing, Stupid

Singha wrote:one reason could be the US kept on printing dollar notes at a rapid pace but
as worlds reserve currency, they could enjoy both high injection of $$ and
high growth with low inflation. PRC took care both of supplying goods cheaply
and recycling the $$ back into T-bills which meant the US Govt kept on
getting what its consumers were sending to the PRC.

New York state could lose 40,000 jobs, $3 billion in tax revenues
19 Sep 2008, 0821 hrs IST,AGENCIES
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NEW YORK: A new projection shows Wall Street's meltdown could cost New York state up to 40,000 private sector jobs and $3 billion in tax revenues over the next two years, two state officials said on Thursday.

The revised numbers in the snapshot of worst case estimates was done Wednesday at the highest levels of New York's state government.

The internal projection stated that New York job losses could reach between 25,000 and 40,000 private sector jobs and tax revenues could drop as much as $2 billion to $3 billion.

The projection is worse than Gov. David Paterson predicted just Tuesday when he said the state could lose some $1 billion in revenue because of upheaval in the financial sector.

Wall Street is a major economic force in New York state, generating one-fifth of the state's revenues each year.

The officials spoke on condition of anonymity because they weren't authorized to comment on the fiscal analysis.

Both hits would be substantial. The total New York state budget including federal funds is about $120 billion, and the state has about 7.25 million private-sector jobs.

State officials used the model of the fiscal damage to New York after the Sept. 11, 2001, terrorist attacks. Then, Gov. George Pataki said it was the worst financial hit to New York since the Great Depression 70 years earlier.

The new analysis includes the stock market drop, lost revenue from transactions and projected lost income tax revenue from Wall Street jobs.

Three of the five major US investment banks, Bear Stearns, Lehman Brothers and Merrill Lynch, have either gone out of business or been driven into the arms of another bank. The two remaining banks, Goldman Sachs Group Inc. and Morgan Stanley, are under siege.

Paterson's office issued a statement late Thursday saying there was no new projection for public release.

John Snow wrote:Swamy G ji the prices went up for two reasons
a) because of low intrest rate and easy availabity of funds

b) because speculative.buyers entered the market because house values were appreciating nation wide more than 6 percent and money from stocks started flow into housing

Typing from blak berry can go into more

VikasRaina wrote:Also if easy money was available, why did not the inflation numbers go up in last 4-5 years. Normally if there is easy availability of liquid in the market, the inflation numbers should go up. We didn't see anything going up other than housing prices..?

Is it that the all liquid in the market was absorbed by housing bubble only ?

John Snow wrote:Inflation did go up.
Dont go by govt figures watch the gas , bread, and milk price they are true indicators of inflation at the street level not LCD plasma prices.
Busy now into a meeting to get pink slips

September 18, 2008, 5:44 pm
A Modest Proposal to Help to Save the World
Posted by Dennis K. Berman

It is about trust. Banks don’t trust one another to lend. Individuals are increasingly fearful of trusting, too, scared of putting their cash in money-market funds that lubricate the entire economy.

The root of all this panic lies, of course, in the deflating prices of mortgage assets and their gruesomely-twisted derivatives such as collateralized debt obligations, and synthetic-CDO-squareds.

The problem is that banks, hedge funds, and insurers aren’t too inclined to talk about the prices of these securities–what is known as their marks, in part because they don’t want anyone to know what they are. And that makes them just as suspicious about their own counterparties. If I’m fibbing, then everyone else must be fibbing.

The mistrust and misinformation feeds on itself, and before long the system grinds to a halt.

But what if there were a simple way to make everyone honest? And wouldn’t that honesty help clean up the markets, as everyone could see the prevailing market prices–for better or for worse–and get to the business of buying and selling?

That step would be to strongly ask (or perhaps even require) that banks, insurers and maybe even some hedge funds contribute their market prices to a fully transparent, searchable database of pricing data. This could be easily organized, because each security has a separate identifying number–called its CUSIP number–that makes for easy tracking.

In other words, everyone shows their hand, for better or for worse.

The markets rallied this afternoon on the expectation that the government would go one step further–and collect all these bad assets into a central clearinghouse. Taxpayers would, of course, pay a monumental price to absorb all the losses. And there could be lots of objections from market players who would be fearful of where their marks would stack up against competitors.

With the markets pleading for some sort of federal bailout, such a simple step may get trampled underfoot. But the interim step of price discovery may go a long way to establishing a market without immediately spending taxpayer money.

September 19, 2008, 10:35 am
Mean Street: A Wall Street Conspiracy? Of Course.
Posted by Deal Journal

You know things are desperate when Wall Street honchos start reverting to conspiracy theories.

Three days ago, Morgan Stanley CEO John Mack saw no good explanation for his stock’s death spiral. He didn’t have to say “conspiracy,” but you knew what he meant.

meanstreetAt the time, I thought, “The nerve of Mack! Conspiracy theories are supposed to be for the little guy.”

Like me. When I spent a year as a day trader, I had a conspiracy theory for everything. Who was to blame for the late day sell-off? “They” were. The short squeeze? “They” did it.

Just who are “they”? Market-makers? Hedge funds? Quants? Some clueless day trader and his buddies? Apparently neither I nor John Mack really knows.

But we love our conspiracy theories, especially when we run out of explanations for why things turn against us. That is exactly the genesis of Wall Street’s and Washington’s current witch hunt for short-sellers.

Somebody is pushing the U.S. financial system into the abyss. And it has to be a conspiracy of short-sellers. Or does it?

Thursday, Wall Street and Washington pledged to find out.

SEC Chief Chris Cox put in place new short sale trading rules and announced plans for greater hedge-fund disclosure. New York Attorney General Andrew Cuomo opened investigations into short-sale abuses.

Meantime, Jim Cramer appeared on CNBC and raised the specter of “financial terrorism.”

John Mack worked the phones to lobby for a full ban on short sales of all financial stocks. And Thursday night, Mack got his way. The SEC went further and banned short-sales in 799 financial stocks.

Conspiracy? It certainly felt like one–but a conspiracy to squeeze the shorts, not destroy Morgan Stanley. And the timing was beautiful.

Around 1 p.m. eastern time, the U.K. Financial Services Authority banned the short sale of any financial stock until early 2009. Shortly before 3 p.m., and just in time for the pivotal last hour of trading, the Treasury let the media know it was considering an RTC-type bailout.

That was enough to set the shorts running to cover their positions and drive the Dow up more than 400 points.

Here is a mind-bending conspiracy theory: A conspiracy of the longs to drive out the conspiracy of the shorts. And both conspiracies are probably impossible to prove.

It does seem very likely that there has been some monkey business in the short-selling of financial stocks. The volatility in certain shares has been astounding. Lehman Brothers and American International Group disintegrated in a matter of days.

But as of Sept. 16, less than 3% of Morgan Stanley and Goldman shares were sold short. Is it heavy short selling or just panic selling that is driving the shares down? Or just the two feeding off each other?

It will be interesting to see what Cuomo’s investigations turn up. He probably will find something. A rumor here or there. Piling on by hedge funds in momentum trades. Perhaps a trade in the credit-default-swap market that produced a panic effect in the shares.

Whether any of what he finds is illegal is another matter.

It is, of course, delicious irony that the broker-dealers may be the victims of abusive short-selling. They founded the hedge-fund revolution by arming ex-traders of theirs to the teeth with capital, leverage and trading technology.

But when the children of the revolution turned on the founders, the founders ran to Washington for protection. The brokerage industry fought regulation at every turn, pleaded for regulators to leave the hedge funds alone and asked for the removal the uptick rule. Leave us free to trade, they demanded.

Nowadays, the freedom of the markets isn’t so attractive. It’s scary. And when people are scared, you always get a conspiracy.

So good luck to Cox and Cuomo as they set off to find and punish the guilty short-sellers. It may be a long and fruitless journey.

But it could still be a success. Like all witch hunts, it is really a convenient distraction. The real mission of the short-seller conspiracy is to buy time for Wall Street and Washington to line up taxpayer money to pay for the sins of the past.

CalvinH wrote:I have question for the gurus here

The excess liquidity was absorbed in the RE market and drove demand and thus prices upwards, leading to housing rush, sub-prime loans, further increase in demand and further increase in prices

What bought this cycle down. Why suddenly house values started to go down...was it resetting of ARM after some time due to which people couldnt pay and foreclosures began

I want to know what was the trigger that stopped this cycle and started a downward spiral.

Financial Shock A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis
by Mark Zandi (Author)


The subprime financial crisis is the decade's #1 financial story. What happened? How did it occur? And how can we prevent similar crises from happening again? Dr. Mark Zandi answers all these critical questions - systematically, carefully, and in plain English. Zandi begins with a fast-paced "history" of the crisis: where it started, how it spread, and where the fallout has landed. Next, he illuminates its deepest causes, ranging from the psychology of homeownership to Alan Greenspan's missteps. You'll watch the "flippers" at work and the real estate agents who cheered them on. You'll learn how Internet technology and access to global capital transformed mortgage lending, helping irresponsible lenders "drive out" good ones. Zandi demystifies the complex financial engineering that enabled lenders to hide growing risks and shows how global investors eagerly bought in, despite key warning signs. You'll discover how homebuilders contributed to the crisis, and how flummoxed regulators and policymakers failed to prevent it. Zandi offers indispensable advice for investors who must recognize emerging bubbles, policymakers who must improve oversight and citizens who must reduce their risks, so they can survive whatever comes next.

Back in the middle of 2007 when the sub-prime problem first surfaced......I remember a talking head on TV saying the sub-prime issue would not become a problem. His rationale was that sub-prime only represented a single digit percentage of the total mortgage market......and therefore it would have no major impact on financial markets......even if all sub-prime debt went bad. Boy was he wrong!! I have been curious how the sub-prime fiasco almost brought down the entire world financial markets.

Another disclaimer is that I have not personally been involved much with mortgage loans. My first mortgage was back in 1978. It was a 30 year fixed mortgage, and since I only put 10% down, it was mandatory to have mortgage insurance......until my equity reached 20%. I got additional 30 year fixed mortgages in 1980, 1994, and 1995 due to job location changes. In 1999, I got a variable rate loan on a new home.......put 50% down......and then converted to a 15 year fixed rate in early 2007. I also live in Illinois, not one of the national hotbed markets for sub-prime lending.

Zandi says there has been a financial markets panic about every 10 years. He predicts the next one will involve U.S. government debt with all our under-funded liabilities. Other authors have said there is a stock market crisis about every 25 years........because it takes this long for the "burned" generation to retire and be replaced with youngsters who have no memory of the last bubble.

Zandi explains the sequence of the sub-prime fiasco like this:

1. Fed lowered interest rates after 9/11 to stimulate the economy
2. Fed was not worried about creating inflation because the shift in manufacturing to China actually threatened deflation, not inflation
3. With returns on savings accounts being so low, plus the stock market going nowhere after the Tech stock bubble burst.......people chose to invest in their homes
4. Foreign countries could not get decent returns on fixed income investments due to low interest rates......so they chose to buy slightly higher yielding mortgage backed investments
5. Local banks changed from being prudent lenders holding mortgages to simply financial intermediaries driven by loan processing fees. Since they no longer held any mortgages, they didn't have to worry about making sure they were issuing loans that homeowners could really afford.
6. New companies jumped into the mortgage lending market ...with the same motives as the banks. The majority of borrowers did not even realize how risky their new loans were....especially if home prices declined.
7. Wall Street created exotic mortgage backed financial instruments and marketed their higher returns.
8. The Federal Reserve Chairman and all the regulators were asleep at the wheel.
9. Financial rating firms completely missed the boat on how risky these new financial instruments really were.
10. Eventually the music stopped.....there were no people left to keep bidding up the prices of homes. The house of cards came tumbling down.


Zandi points out that sub-prime mortgages peaked at ½ of all mortgage originations.

A way was found to avoid the mortgage insurance if you put down less than 20%. You simply borrowed 80% on the first loan, then immediately took out a 2nd loan for the remaining 20%......apparently mortgage insurance is not required on either the 1st or 2nd loan.

Verification of income also went out the window.

Zandi points out that Americans lead the world in terms of how much housing cost we incur. Americans spend 33% of spending on their homes, while New Zealand spends 25%, France 20% and Japan 14%.

Zandi points out that at the peak of the boom in 2006, foreign investors owned 1/3 of all U.S. mortgages.

Zandi also points out that the price-to-rent ratio is a good bubble indicator.......analogous to the PE ratio in stocks. This ratio has been about 17 the last 25 years......but it peaked at 25 at the height of the boom. For this ratio to return to its 25 year average of 17, national U.S. house prices must drop 25%........and the hottest markets must drop 35%.

The author says the sub-prime bubble is 4 times as bad as the S&L fiasco ($1 Trillion versus $250B).

The author has some recommendations to avoid another sub-prime crisis including:

1. Lenders must verify income and assets
2. Lenders must verify borrowers are able to pay back the loan
3. Mandatory escrow for taxes and insurance
4. Start teaching personal finance in high school

I found the book easy to read and entertaining. However, I got very frustrated with the color coding of his charts. I could not distinguish what the variables were in most of his charts. Maybe he made them in color, and then the black-white conversion process made them illegible.

Given my background, I am shocked at how loose the lending process has become compared to 20 or 30 years ago. As the author points out, everyone in the lending food chain assumed "the other guy" had checked out the quality of the loan made...and in reality nobody checked it out.

After reading about the Tulip bulb and South Seas bubble......plus living through the 1989 S&L crisis, the 2000 Tech wreck, and the 2007 sub-prime fiasco.........this book has help give me a better idea of how to recognize the next financial bubble.

Some of the key indicators of bubbles include:

1. "It's different this time"
2. TV shows and advertisements on speculating including store owners who sell stock instead of their normal goods (Tulip craze), ads showing taxi drivers who quit hauling passengers and day-trade (Tech Stocks), and TV shows dedicated to flipping houses
3. Historic valuation ratios are far exceeded (Tulip bulbs, PE ratios of 100 for Tech Stocks, Price-to-rent ratio for housing)


All in all, I thought the author did a good job of exposing the role of each member in the housing loan food chain had in creating the sub-prime mess.

CalvinH wrote:I have question for the gurus here

The excess liquidity was absorbed in the RE market and drove demand and thus prices upwards, leading to housing rush, sub-prime loans, further increase in demand and further increase in prices

What bought this cycle down. Why suddenly house values started to go down...was it resetting of ARM after some time due to which people couldnt pay and foreclosures began

I want to know what was the trigger that stopped this cycle and started a downward spiral.

Suraj wrote:The primary reason prices went down is that ... the houses were not worth so much.

The New York Times

September 20, 2008
Talking Business
A Hail Mary Pass, but No Receiver in the End Zone
By Joe Nocera

It was the end of the worst week for financial markets since 1929, and Treasury Secretary Henry M. Paulson Jr. looked sleep-deprived.

He had begun the week agreeing to let Lehman Brothers go bankrupt, arguing that the government had to stop putting taxpayers’ money at risk. Then, midweek, he brokered a deal to rescue the American International Group with an $85 billion loan from taxpayers — arguing that the risk to the financial system was too high to allow the world’s biggest insurer to fail.

Neither move had done anything to stop the financial tsunami. So on Friday morning, just as the markets were opening, Mr. Paulson unveiled the government’s latest attempt to stop the bleeding. Maybe it was because he was so tired, but there was none of the glass-half-full blather that is de rigueur for a cabinet secretary. Instead, his flat, just-the-facts-ma’am voice and weary body language conveyed an unusual sense of urgency.

The core issue, he said — the mistake that had led to all the other mistakes — was that “lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing.” True. As for Wall Street, toxic mortgage-backed securities had become “frozen on the balance sheet of banks and financial institutions.” He added, “The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.” True again.

And that really is the crux of the matter — the financial system has seized up. But so far, the government’s actions haven’t helped. Letting Lehman go bust may have sounded good at the time, but it has had disastrous consequences.

It has led to complete chaos in the multitrillion-dollar market for credit-default swaps and was a crucial reason Morgan Stanley was forced to scramble to stay alive this week. It is also why questions were raised about the viability of Goldman Sachs, a firm with a pristine balance sheet and almost none of the bad assets that are bringing down other firms.

The rescue of A.I.G. further undermined confidence because, within the space of several days, the government did a complete about-face. The bailout suggested the Treasury Department was as confused about what to do as the rest of us.

So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem in the market right now: an utter lack of confidence.

Nobody understands who owes what to whom — or whether they have the ability to pay. Counterparties have become afraid to trade with each other. Sovereign wealth funds are no longer willing to supply badly needed capital because they no longer know what they are investing in. The crisis continues because nobody knows what anything is worth. You simply cannot have a functioning market under such circumstances.

Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday, but I’m not hopeful. One solution being promoted by the Securities and Exchange Commission — to make life more difficult for short sellers — is a shameful sideshow. A second solution, which Mr. Paulson announced Friday morning, requires money market funds to create an insurance pool to cover themselves against losses.

That may provide comfort to investors who equate money funds with savings accounts, but it is fraught with moral hazard.

And the third solution — the big megillah — is Mr. Paulson’s plan to create a new government mechanism to buy mortgage-backed securities from big banks and investment houses. Once they are off those companies’ books, life can return to normal — or so Mr. Paulson hopes.

He acknowledged that it would likely cost taxpayers “hundreds of billions of dollars.” I think it will cost more than $1 trillion.

It is a weird tribute to the scale of this crisis that Mr. Paulson felt he had no choice but to rush this proposal out, because as the day progressed it became increasingly clear that the Treasury Department didn’t yet know how this mechanism was going to work. It is an idea of a plan more than an actual plan. In football, they would call it a Hail Mary pass. Sometimes, of course, a Hail Mary pass is completed for a touchdown. But most of the time they fail.

Let’s take a closer look at the government’s latest response.

KILL THE SHORT SELLERS It’s understandable why people get upset at short sellers in tough times. As President Bush put it Friday, short sellers are “intentionally driving down particular stocks for their own personal gain.” But that perception is more myth than fact, and in any case, it’s not the dynamic here. Stocks are falling because companies made huge mistakes that have caused them a heap of trouble. Indeed, in July and August, short interest in financial stocks declined by 20 percent. Why did the stocks continue to go down? Because there were too many sellers and not enough buyers: it’s that confidence thing again. Blaming the shorts is classic blame-the-messenger behavior.

The S.E.C. jihad against short sellers, which includes the banning of short selling on 799 stocks and forcing disclosure of large short positions, is nothing more than playing to the crowd. It is simply appalling that as one firm after another vaporizes — firms, let’s remember, that the S.E.C. was supposed to be regulating — the only thing the agency can think to do is flog the shorts.

There were so many better moves it could have made. After Bear Stearns fell, it could have sent SWAT teams into all the other financial firms to assess their mortgage-backed paper. It could have then announced to the world the health of each firm, which would have helped the market regain some confidence. It could have forced firms to disclose their mortgage-backed holdings so that counterparties could evaluate them. It did none of these things.

Then again, maybe the S.E.C. is trying to cover up its own culpability in this crisis. Four years ago, the agency pushed through a rule that allowed the big investment banks to take on a great deal more debt. As a result, debt ratios rose from about 12 to 1 to more like 30 to 1. Guess what Lehman’s debt ratio was when it went bust? Yep: 30 to 1.

SAVE THE MONEY MARKET FUNDS The precipitating event here was the news that the Reserve Fund, a money market fund that caters to institutions, had “broken the buck” and was paying investors 97 cents on the dollar. That is only the second time that’s ever happened, and it had to scare investors, because most of us have come to think of money market funds as being the equivalent of bank savings account — perfectly safe.

In the aftermath, investors in the various Reserve money market funds pulled $58 billion out in the space of a week, leaving the firm with only $7.1 billion. If that same fear had spread across other money funds, it could well have led the funds to stop accepting short-term commercial paper. That would have been a disaster, because big companies rely on the commercial paper market to finance their day-to-day needs.

Under the circumstances, insuring the money market funds probably makes sense. It will calm investors and keep the commercial paper market functioning. But think about the moral hazard! It bails out poorly managed money funds — the ones most likely to break the buck — at the expense of funds that haven’t taken the extra risk that causes a sudden drop in value.

And then there’s this: If you have your money in a bank account, only $100,000 is insured. But if you have it in a money market fund — which usually has a slightly higher yield precisely because it has a small element of risk — you now have unlimited insurance. It’s the world turned upside down.

THE BIG MEGILLAH For the last few weeks, a growing chorus of voices has called for the establishment of a new Resolution Trust Corporation, the entity the government devised in the wake of the savings and loan crisis to take over, and eventually sell off, the assets of failed S.& L.’s. On Wednesday, that chorus got its most powerful voice, when Paul Volcker, a former Federal Reserve chairman, co-authored an op-ed article in The Wall Street Journal.

That crisis, however, was very different from this one. Most of the assets in the S.& L. crisis were real estate — which are always going to have value. And the government didn’t have to acquire them; it simply took them over and, over time, sold them. This time, the assets are complex derivatives of uncertain value that the big firms will actually be selling to the government.

But how is the government going to assess these securities — and what price will it pay for them? In many cases, these securities aren’t being sold because they are still overvalued on a firms’ books. That is, their mark-to-market price is unrealistically high. Will the government buy it at the too-high price? If it does, the firms won’t have to take additional write-downs — but it will constitute a huge, unjustified bailout of Wall Street. (More moral hazard.)

But what if the government drives a hard bargain, and gets the securities for what they are really worth — 20 cents on the dollar, say, instead of 50 cents? In that case, the firms would have to take yet more enormous write-offs, which would further damage their balance sheets, and they would have to raise billions more in capital. Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.

Finally, there is the question of how much it will ultimately cost. “Institutions so far have written down $550 billion globally of bad debt,” said Daniel Alpert, managing director of Westwood Capital. “We think that when you add up all the problems in the residential housing market still to come — further erosion of housing prices, mortgage foreclosures and so on — we are going to need another $1 trillion of write-downs.”

In other words, for all the toxic securities that Wall Street has acknowledged holding, there will be yet more mortgage-backed paper that will go bad as the housing market continues to fall. As much as we all hope the worst is over, it’s probably not.

And as much as we might hope that the government finally has the answer, it probably doesn’t.