- Henry Blodget at Clusterstock says this will turn the US Treasury Department into the world’s biggest private equity firm, which is actually a good idea:

These potential changes are actually positive, but they still don’t address the elephant in the room: writedowns.

Historically, the most successful financial system bailouts have done two things:

• Recapitalized banks (by injecting capital)
• Forced banks to write down asset values to nuclear winter levels, thus staving off the need for future writedowns (and, in so doing, encourage private investment).

It is hard to believe that, say, Citigroup has written down its $546 billion of on-balance sheet consumer assets to nuclear-winter levels, let alone the off-balance sheet ones. Thus, any new investor will likely get its equity wiped out by future writedowns and additional capital. This is a major deterrent to investing in Citigroup.

The new TARP modifications will deal with this to some extent by forcing financial institutions to raise private capital alongside the government money. Private investors, presumably, will be more concerned about preserving their capital than the government will be and therefore won’t invest unless the banks have written their assets down appropriately.

Forcing banks to raise private capital will also get the government out of the business of picking winners, which has created the potential for unfairness, corruption, and a whole host of perceived improprieties, as well stoked the fires of senators like Chuck Schumer who complain that the taxpayer money is only going to healthy companies, not the ones who need it most.

- Of course, this isn’t stopping a lobbyist frenzy at the Treasury Department. The New York Times reports that the department “is under siege by an army of hired guns for banks, savings and loan associations and insurers – as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.”

- Despite commodities traders’ brief surge in optimism over China’s $586 billion bailout, oil is down below $59 a barrel – a new 18-month low.

- Gold isn’t faring much better. An ounce of the stuff is now selling for $733 this morning.

- For those of you worrying that were experiencing another depression, David Levy in Institutional Investor says we’ll get one, all right, but it will be “contained” by government intervention. The following extract was picked up by Kedrosky at Infectious Greed:

Without the government’s containment the economy would indeed ace another Great Depression, but fortunately, nothing so dire will occur. The government will prevent a collapse of the financial system and partially buffer the damage to the economy, containing the depression. The government will succeed not because it is wise about economic affairs or because it won’t make mistakes. Rather, it will have no choice but to keep patching holes in the financial sector, and its sheer size and presence guarantee a sizable fiscal stabilization. The government has virtually unlimited power to intervene to protect the basic functioning of the financial system, and in an emergency can spend whatever is necessary. Although government solutions will not fix the fundamental problems that will cause the depression, they will limit the financial fallout. By the end of the contained depression, the government will likely have committed trillions between rescue operations and running huge deficits. And although some may complain about the price tag, it will be a bargain for enabling us to avoid another Great Depression.

- Levy’s theory is predicated on the rather absurd notion that the US has “virtually unlimited power to intervene to protect the basic functioning of the financial system.” According to a report on CNBC that “virtually unlimited power” might be a lot more limited than Levy imagines.

The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

“The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system” and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

“In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off,” Hennecke told CNBC.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

- The wrangling between Bush and Obama comes in the wake of news that GM’s shares tumbled to 1946 prices, closing down 23% to $3.36, as analysts downgraded the stock on worries it would soon run out of cash and shareholders would be wiped out by any federal bailout.

- GM has 263,000 workers worldwide. If it does go under, that’s a hell of a lot of people joining dole queues.

- This, of course, would have disastrous consequences in the US, where unemployment rates are spiraling. If you take the U6 count of unemployed, which includes “marginally attached” workers and those who are employed part time for economic reasons, unemployment in the US is now at 11.1%, up from 7.9% last year at this time.  According to Karl Denninger on The Market Ticker:

While this is not in “Depression” territory the trend is especially bad, the revisions are stunning, and we haven’t even had an official recession declared yet.  With more than one in ten people who want a full-time job unable to get and hold one along with the rest of the economic outlook things are definitely getting worse and the only light I see in the tunnel is an oncoming bullet train.

- Or take this humdinger from John Crudele in the New York Post:

Each month Washington adds many thousands of jobs that it believes – but can’t prove – are being created by newly formed companies.

The logic behind this calculation – which is called the birth/death model – is as simple as it is extraordinary: even in a horrible job market and during a credit crunch as we have today, Washington believes courageous entrepreneurs are forming businesses and hiring people.

The October report – the one that reported the 240,000 loss of jobs – includes a guess that 71,000 of these uncountable, new-company jobs were created.

Included in those 71,000 made-up jobs are 7,000 that were supposed to have been created in construction and 13,000 in “financial activities.”

- Job losses are also reaching alarming rates in China. Paul Kedrosky on InfectiousGreed.com notes that 2.7 million job losses in Guangdong province alone in last seven months.

- Even more worrying is the impact China’s $586 billion bailout plan could have on the US Treasury market. To finance its plan, China “could have sell its holdings of U.S. Treasury and agency securities or slow its rate of accumulation in these securities,” according to MarketWatch.

China holds roughly $1 trillion of U.S. securities, including $541 billion of US Treasurys and $200 billion in agency securities, according to Miller Tabak.

Massive selling of those securities, at a time when the US government is already expected to issue large amounts of debt to finance its own economic stimulus measures, could further raise borrowing costs, such as mortgage rates, which are benchmarked to bond yields.

There’s only $60 billion left of the first $350 billion tranche of what was once known as the Trash Asset Removal Plan (and is now known as the only pot of available money in the world). So many companies of all shapes, sizes, and flavors are demanding cash that Treasury can barely process the requests. Congress will presumably order the Treasury to immediately begin doling out the second $350 billion, which, a few months ago, was seen as a sort of “just in case” reserve fund. No more.

– “The once unthinkable prospect of zero interest rates moved closer to reality yesterday,” says The Times. “Interest rates going to zero in our heroic struggle to become Japan,” says Henry Blodget on Clusterstock.

– Even Japan is racing to become the next Japan. Today, Japan announced it’s joining the global bailout bonanza. Prime minister Taro Aso says he will pump $275 billion of public funds into world’s second-largest economy. This will go toward expanded credits for small businesses and a cash payback to every household.

– Uncle Sam is also considering spreading more government-funded love around, too. This from the NYT:

Senior Bush administration officials are discussing a plan that could help up to three million homeowners struggling to pay their mortgages to stay in their homes, three people briefed on the proposal said Wednesday.

The initiative could be the most sweeping government effort directed at mortgage borrowers since the financial crisis began last year. Under the plan, the government would agree to shoulder half of the losses on home loans if mortgage companies agreed to lower borrowers’ monthly payments for at least five years, according to the people briefed on the plan who asked not to be named because details were still being negotiated.

– U.S. stock futures pointed to strong gains this morning ahead of data that will likely show that GDP is contracting — further evidence, if any were needed, that Mr. Market doesn’t give a hoot about the ‘real’ economy. Yesterday the Fed handed the market another rate cut. And there’s nothing the market loves more than a rate cut…all that easy money to play with.

– “Talk about priming the pump for the next bout of excessive exuberance,” says a commenter on Paul Kedrosky’s Infectious Greed blog. “If the next big problem isn’t hyperinflation, it will mean that we have crashed and burned. I believe there is a movie called No Way Out that basically says it all! Nothing good can come out of where we are at the present moment economically.”

– We’re already seeing a massive rally in commodities, just one day after the Fed cuts. “Gold, crude oil and corn extended the biggest surge in commodity prices in five decades on speculation interest rate cuts in the U.S. and China may revive demand for raw materials consumption,” reports Bloomberg.

The Reuters/Jefferies CRB Index of 19 raw materials jumped 5.9 percent yesterday, the most since at least 1956, when the data begin. The index is still down 24 percent this year. China, the world’s largest industrial-metals user, trimmed interest rates for a third time in two months, and the Federal Reserve slashed bank borrowing costs in the U.S., the biggest oil user, to 1 percent.

– The broader Standard & Poor’s 500 index did even worse. The S&P 500 was the worst performer among the major indexes. It shed a whopping 6.1% and hit its lowest level since April 2003. The fear and loathing on the Street is palpable.

– Today, U.S. stock futures slipped thanks to what normally chirpy MarketWatch calls “the brutal economy that companies are navigating.” S&P 500 futures edged 2 points lower to 900.80 and Nasdaq 100 futures fell 7.25 points to 1,240.70. Dow industrial futures rose 5 points.

– Agora Financial’s Chris Mayer, one of the smartest contrarian investors we know, is quoted on Addison Wiggan’s 5 Min. Forecast blog as saying: “What we are going through now is a history-making crash. There is a reason it caught so many people by surprise — it hasn’t happened before, not quite in this way.”

– Addison also quotes Bill Bonner. Bill has been calling this crash for years in The Daily Reckoning. His “trade of the decade” — sells stocks, buy gold outlook — now looks like a very wise move. Bill says we about to be hit with a protracted bear market combined and a deep recession.

“When Mr. Market goes into a sulk, he takes a long time to come out of it. Real bear markets last 10… 15… 20 years. Judging by the meltdown in the financial sector and the rapid losses we’ve seen over the last three weeks… we have a real bear market on our hands…

“With no more easy credit available to them, consumers are doing what they have to do — they’re cutting back. How much? For how long? No one knows the answers to those questions, but our guess is this: more and longer than you thought.”

– We didn’t expect permabear Nouriel Roubini to be calling a bottom. But we didn’t expect such a bleak prognosis either. Roubini spoke yesterday morning on CNBC. Henry Blodget on Clusterstock summarizes Roubini’s breakdown of the coming financial Armageddon:

# The worst is yet to come.
# The next few weeks and months are going to have lots of negative surprises on the economy
# The flow of market news is going to be much worse than expected–just like last week when every piece of news was awful
# Earnings are going to surprise on the downside. There’s going to be a sharp fall in earnings, not just financial sector, but everywhere.
# Even in financial system, where we avoided a systemic global financial meltdown by an epsilon, there will be significant risk downward. Emerging markets going into a crisis. Having a blow up of the CDS market. Having hundreds of hedge funds closing down.
# So I significant downside risk for the financial markets and economy. I think the worst is yet to come.

– Blodget says yesterday’s wipeout in the stock market was a good thing, because it means the market is behaving rationally.

Trading down on profit warnings is a pretty rational and even normal response to economic news. The reason that’s good news is that it means we’re not just experiencing mysterious problems in credit markets or some new financial innovation no one ever heard of exploding all over the markets.

– Argentina, where the ContrarianProfits offices are based, is royally screwed by the looks of things. The hugely unpopular president President Cristina Fernandez de Kirchner has announced she will seize pension funds. Cristina, ever the populist, claims the move is to “protect” people’s money. The reality is she plans to use the funds’ $29 billion to meet the country’s spiraling financing needs. The Argentine stock exchange, the Merval, plunged as much as 18% on the news.

– Addison Wiggan’s take on it in The 5 is dead on.

Beset with debt and overcome by its bond obligations, the Argentine government nationalized $30 billion in private pension funds yesterday.

Fifty-five percent of those pensions are government debt holdings… and now that Argentine leaders have seized them, they can essentially write them off. The rest of the holdings they’ll use to finance debt payments and keep the government running.

Argentina is the second largest economy in South America. It is one of the world’s top five exporters of beef, soy, corn and wheat. It still can’t afford to keep the lights on. Argentine citizens are being asked to suspend reality and trust the government is good for the money when they’re ready to retire.

Hmmmn… puts us in mind of that ’70s-era Rainbow rock ‘n’ roll tune “Can’t happen here, can’t happen here. All that you fear, they’re telling you, can’t happen here.”