I sense that the exercise may fail for this reason – the investors won’t buy at a level that works for the originators and $8bn will only go so far at a level that represents a subsidy versus the secondary market. So why not multiply the effect by pouring the $8bn into “junior AAA” tranches so that other investors will be attracted by the subordination this affords to the “super senior” tranches? But my problem with this is that the other investors might get hooked on the 30% credit enhancement this drives out when they will ultimately need to get comfortable with 3% again for the market to truly work.

As they say “Success has many fathers, but failure is an orphan.” If it doesn’t work, will there be so many people claiming to have had a role in influencing the government to do this, or will they just blame the dud public servants executing it?

To what extent should the AOFM use the capacity to subordinate its stake to “super-senior” tranches (for a lower than market premium) to attract investors to the super senior tranches (now that all the fundie bids have disappeared)? Would it just wean the investment community onto a higher level of subordination and so be detrimental in the long run?

On assets, take RMBS. The Govt has guaranteed deposits a bunch of banks and, because the situation was dire and it wanted to be decisive, it went further and guaranteed other forms of debt they issue.

That may all have been sensible, though I think there’s a strong presumption that they should charge some amount – calculated to be a rate that generates expected commercial returns for the govt – for all the guarantees they offer.

Problem is the banks are now in this bullet proof position and they’re bleeding the rest of the financial system dry. We had a foretaste of this in the RMBS market where Chris Joye, Joshua Gans and I (following their initiative) proposed that, for as long as necessary the Govt get in the business of guaranteeing simple vanilla mortgages – to revive the RMBS market. I pointed out that the government could make some good money doing it.

The point about that was that it was competitively neutral. One would have underwritten the market, and anyone could play in it. I would imagine something similar needs to be done with mortgage trusts and CMTs but I don’t claim to any deep knowledge of these markets, and so there might be holes in the proposal. I’d welcome anyone pointing out what they might be.

- wouldn’t the impact on the “shadow finance sector” flow mainly from the events in global finance markets – irrespective of deposit insurance?

-”I’d rather see the Government dealing with the crisis by guaranteeing assets —rather than the institutions”. How would that help?

Sorry, I am very confused at present.