This policy isn’t entirely crackbrained, sorta-kinda. If I were to hazard a guess, the idea behind papering over a commercial-side solvency crisis in this way is to put a floor under the debt and inter-bank credit markets while the equity value of the commercials falls to attractive levels. Once the substantial private capital we all know is sitting on the sidelines at present [not quite, it's sitting in RMB bearing deposits more like] sees that the Fed has and will keep the commercials from going under in formal terms, the notion is that this private money will buy up cheap equity in the life-supported commercials and gradually recapitalize them ‘privately,’ over the next six-twelve months to kick around a number.

This is a desperate undertaking, but in the circumstances what are the options? Nationalization would be better and cleaner, to me, but the Fed does not currently have the authority, and it is not conceivable that they will get that authority out of the doofus last dayz of the Dubya II Administration, to say nothing of the present do-nothing, good-for-nothing Congress (to dust off an applicable and time tested phrase). If, and I say if, there is no major financial down cycle in the US over the next six months, this desperate expedient may have a chance to succeed: wait out private capital until they see that the worst is over and the price is right to buy big banks chunk by hunk on the cheap. I very much doubt that this scenario for the next six months applies as we have yet to see the full impact of any asset class depreciation except subprime re enter the financial system fully (even LBO loans aren’t being written down/off to the same level of the problem), nor have consumer spending and unemployment decline pressures been priced into _anything_. We aren’t going to get a hard landing to me, we’re going to get a third story fall if we’re lucky. So the Fed’s second-story climb-down scenario does not seem the likely one.

I’m not going to call the Fed-Treasury crazy for what they are doing. But I rather wish they were doing something else. Sitting in a stinking pool with ones fingers in ones ears is not a mid-term policy, let alone a long-term one. [Yeah, that's a mixed metaphor, but hey one does what one can when opining in real time. : ) ]