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.

The usual strategies to start a rally were tried.

1. Jam the futures in the runoff (the 4 to 4:15 time after the cash market closes but futures and index options still trade).
2. Start a rumor of a Fed rate cut.
3. Pump up the tech stocks in the pre-market.

We’ll see if they work. In the meantime, GE warned of a poor quarter, unemployment claims jumped to nearly half a million and durable goods orders dropped by 4.5%. Rate cuts are really working, eh? In the meantime the bailout package is getting done, despite massive public opposition, to keep the “campaign contributions” flowing. If as much attention was paid to the real economy as is being paid to Wall Street and maintaining stock prices, we might make some progress.

The Rasmussen Poll reports that voters overwhelmingly reject the “Paulson Plan.” Amazingly, there may be intelligent life on the planet after all. This morning, Mr Bernanke confessed that the real goal of the plan was to re-capitalize the banks, which basically means overpaying for the assets so that the banks can show profits. If you want to re-capitalize the banks, why not just - put capital in? Just buy super-preferred convertibles, essentially as was done for AIG? The answer is, of course, that would hurt the shareholders. Ben and Hank’s buddies, in fact. If, as proposed, they pass the re-capitalization through the P&L, then of course it will yield profits. And profits yield - bonuses! And bonuses will yield - campaign contributions! speaking engagements! corporate jet junkets! interns! Voilà! Problem solved! Anyway, after the political theater in Washington is over doubtless it will be passed without substantial change.

Edit: Good piece by Martin Weiss (Weiss Research’s business is rating banks):

1. Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or 36 times the assets of banks on the FDIC’s list.

2. Think twice before providing a broad bailout for U.S. debts given the wide diversity of mortgage holders and the great magnitude of the total debts outstanding in the United States. Just-released Federal Reserve Flow of Funds data show that, beyond mortgages, there are another $20.4 trillion in private sector consumer and corporate debts, plus $2.7 trillion in municipal securities outstanding.

3. Recognize that, among banks and thrifts with $5 billion or more in assets, there are 61 banks and 25 thrifts that are heavily exposed to nonperforming mortgages.

Thanks to Jason Goepfert of sentimentrader.com for pointing out the following from 1932:

NEW EXCHANGE RULE CURBS SHORT SALES

In the most drastic reform introduced since the country-wide controversy over short selling began, the New York Stock Exchange announced yesterday that, beginning April 1, its member firms would be required to obtain the express consent of customers before their stock could be lent to protect commitments on the down side of the market.

The stock market wobbled, then rose over the following few days, and then fell by more than 50% over the next four months. As Georges Santayana said: “Those who cannot learn from history are doomed to repeat it.”

GOOG is up 2%, AAPL is up 3%, the mo-mo boyz are back. Everything’s alright, I guess. No need for the bailout. Bernanke just testified that, under the Paulson plan, the taxpayer will pay “hold-to-maturity” prices, not “fire-sale” prices. That’s it then, free money for the boyz. Gotta preserve that executive compensation and put the taxpayer at risk. This is becoming criminal.

Sensing pork in the water, the financial services industry is lobbying and jockeying for the biggest possible bite. All the slime wants in. Disgusting.

Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.

“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday.

The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.

The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”

The terms of the bailout, if it is needed at all, should be so draconian that it is a last resort. The rush to participate shows that it is seen as free money, so naturally everyone wants in. The taxpayer is the sucker at the table.