Chris Whalen, the co-founder of Institutional Risk Analytics, argues that the Treasury should only pay for the losses on dodgy securities, not buy them up. That seems a good idea to us..

So we know have a couple of solutions:

1. Treasury buying dodgy assets to recapitalize banks. In order to do that, they have to overpay the market prices (Paul Krugman)
2. Treasury buying dodgy assets, slapping the markets back to life, after which they will function more or less normally. The Treasury buying has aided them in ‘price discovery’ as the markets got unduly pessimistic (This, in essence, seems the philosophy behind the Treasury bail-out plan)
3. Just change the ‘mark-to-market’ accounting rule, which in an instant, fixes most problems on the books of financial institutions who are forced to value those dodgy assets at market prices, and since these are unrealistically low, changing the accounting rule would go a long way in recapitalizing the financial institutions
4. Now we have Whalen arguing that the Treasury doesn’t need to buy up whole dodgy assets, just that part that is loss making. In theory, that could stretch those $700B much further, so it’s an interesting thought:

Whalen: Bailout Needed But Misguided

• Monday, September 29, 2008 9:04 AM. Chris Whalen, co-founder of Institutional Risk Analytics, says the U.S. government has to step in and step in big to stop the credit crisis from becoming much worse.
• The “only party who can play” in the markets right now and make a difference is the government, he says.
• What some in Congress still cannot grasp, Whalen says, is that the problem is no longer a matter of a bubble in housing prices or a mark-to-market gap in value.
• “We started off with a bubble in assets in terms of overvaluation,” Whalen tells CNBC. “What we’re looking at coming at us is a much bigger wave of losses on loans, old-fashioned losses, and that’s where the government has got to get involved.”
• Delaying the decision, Whalen says, won’t make a difference to the end result.
• “Look, they can wait as long as they’d like, but one way or another the government is going to end up owning a big chunk of the banking system in the U.S.,” Whalen says.
• However, Whalen says, the bailout bill being voted on likely Monday in Congress provides too much money in the wrong place. Instead of buying up assets, the government should be trying to simply bridge the losses until the private sector can complete the task.
• “Fund the difference between the loss and the real value of the asset, don’t buy the whole asset from the bank, that’s ridiculous,” Whalen says.
• Whalen says that government action is needed but that the credit markets in fact have time, even a few months, to sort out the winners and losers, and that process has already begun.
• The Federal Deposit Insurance Corporation early Monday announced that Citigroup would take over the operations of Wachovia.
• “But the time the next president is inaugurated, we better have a plan in place,” he says. “I think you’re going to see a lot more closures between here and the here and the end of the year, but that’s the good news.”