An interesting reader comment at naked capitalism:

I understand that the explosion in the OIS spread is a reflection of the fear banks have for each others solvency. And it makes sense that it exploded right after the bankruptcy of LEH–it was not the bankruptcy per se, IMO, but the that $110b of senior LEH debt went from trading .95 to .12 in a matter of days that concentrated the market’s attention. If you include the less senior debt that is trading at essentially zero, LEH had $110b hole in its balance sheet. And just days before this, the market was being told and was believing that the $10b disposition of Neuberger was going to solve their funding problems.

Edit: Same thing at WaMu:

J.P. Morgan is going to inherit $176 billion of the home loans. “We think there are $30.7 billion of remaining losses,” Scharf says. “So as of close, we’re going to take on $176 billion of assets, we’re going to mark them down $29.9 billion, and then we have another almost $1 billion of marks to the other portfolios, so we’re recognizing $31 billion of marks related to the loan portfolios.” If it’s a severe recession, expect $42 billion or so of losses. And if it’s a really severe recession, expect $54 billion of losses, Scharf says.

Looks like the valuation set by these outfits on the assets are way too high. Anecdotally, I hear there a lots of buyers for these assets, many hedge funds specializing in distressed debt and others. The banks think they can get a better price from the taxpayer, so they are trying to intimidate the government into overpaying with taxpayer money. It is not that the paper is illiquid, it’s all about the price and believing that Hank, Ben and Congress can be suckered. Which is probably correct.