The bail out plan isn't going to work. Why should they pass it? I can think of a lot of reasons they shouldn't - rewarding criminal behaviour for starters. I'm American by birth and I don't want to see my young nieces paying for this for the the rest of their lives.
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.
Now is there a precedent in this history of bankruptcy--excluding cases of accounting fraud--where bonds collapsed like this once a bankruptcy court opened up the books? I'm thinking the answer is 'no.' Which then makes you re-evaluate the premise that there wasn't fraud at LEH in marking the value of their assets.
Now extrapolate this reasoning across the entire banking system and, voila, you have the seizure of the interbank lending market.
Now this leads me to the question: if the OIS spread represents eminently legitimate fears of inaccurate marks on banks books, how is a commitment from the treasury to buy hundreds of billions of distressed assets from the banks any assurance to a counterparty that that bank will not still become insolvent. Obviously it helps on the margin, but the staggering hole in LEH's balance sheet that was revealed after bankruptcy creates profound fears about the true solvency of C or UBS. Until the market is convinced they are solvent--and TARP does not do this--the OIS spread will remain elevated and lending will remain frozen.
(20min delay)