Remember the hullabaloo over the $700 billion bailout? The bill that would buy “troubled assets” from banks (hence the name). Well, guess what? TARP never did buy troubled assets…and probably never will. Instead, it will continue to inject capital into companies in return for equity. – And now, according to a report in the WSJ, the US Treasury is “considering requiring that firms seeking future government money raise private capital in order to qualify for public assistance.” This is not expected to apply to the existing $250 billion capital-purchase program.

- 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.