Lay this one at the feet of Il Coglione himself. Five minutes after he spoke of the supposed plan, he was forced to admit: “Someone advanced the hypothesis of rewriting the rules. We were only talking about it, but there’s nothing yet.”

An hour later, Pierluigi Bersani, Italy’s shadow minister of the economy, said, “We already have enough problems without Berlusconi adding others. To speak of suspending the markets, and then, after just three minutes, to confusedly take back what you just said only adds uncertainty to uncertainty.”

And sure enough, it turns out that by “someone” Berlusconi meant “someone on the radio”:

“I heard it on the radio,” Berlusconi said about an hour after his initial comments, his spokesman confirmed. “The hypothesis wasn’t put forward by any leader, including myself.”

This morning, White House spokesman Tony Fratto denied that any such plan had ever been discussed.

From Nouriel Roubini, who titles his post “The world is at severe risk of a global systemic financial meltdown and a severe global depression”:

The U.S. and advanced economies’ financial systems are now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system

And from Bloomberg:

U.S. stocks slid and the Dow Jones Industrial Average fell below 9,000 for the first time since 2003 as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis…

“People have lost faith in everything,” said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated Investors Inc. in New York. “We’re dealing with an investment community of atheists right now. Valuations no longer matter.”

And, to stay on the religious theme, from John Jansen:

We are in the midst of an unfolding debacle. It is happening about us. I am not sure how or when it ends, but the end, when it arrives, will radically alter the way we live for a long time.

Whoever wins the US election and takes office in January will need prayers and divine intervention.

All of these are courtesy, as ever, of Yves Smith (who is really starting to scare the ever-loving shit out of me, even though she’s just reporting the news of the day). She expects tomorrow will tell us a lot about just how deep a cesspool we’re swimming in, because it’s the day that the credit default swaps on Lehman will be settled. (Remember, a credit default swap is like an insurance policy on some bit of debt, a way to protect yourself if the company who borrows your money goes broke, as Lehman did.) According to the Wall Street Journal, there is about $400 billion worth of protection on Lehman debt out there. “This Lehman credit default swaps settlement auction will likely be one of the most expensive payouts in the history of that market, something the government is certainly keeping an eye on.”

If everyone did what they were supposed to and hedged their Lehman CDS positions properly, and then things might ease a little next week. If not, there could be even more trouble. Reuters reports that the sellers of Lehman CDS’s (i.e. the insurers) are expected to lose 90% of the value of the outstanding debt. (In very basic terms, what this means is if you hold $10 worth of Lehman debt, and you bought a CDS from me to protect it, I would pay you $10 and I would get your defaulted bond worth $1.) So on top of the losses the banks are already facing from their bad mortgage-based assets, they could be looking at paying out a whole lot of money that they just don’t have.

But there’s a few little tiny bits of good news that Yves Smith rescued from the rubble yesterday. First, the credit markets are starting, ever so slowly, to loosen up. Here’s Smith:

It is way to early to take cheer, but some of the stress in the money markets is backing off a bit. The TED spread is below 4, and ten year credit swap spreads were down to 45 basis points, which is a serious improvement and a genuine positive sign.

Part two of the semi-sweet news is that the Treasury Department may have figured out that it needs to do what Smith, Nouriel Roubini, and Paul Krugman have been trying to tell it to do for a couple of weeks now: namely, recapitalize banks directly. Here’s today’s New York Times on the new plan, again via Smith:

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan, still preliminary, resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers…

+ Reports off the Hill say that a deal is done. $700B total, greater Congressional oversight, restrictions on executive pay, no bankruptcy law changes, no money for affordable housing, the (useless) House GOP insurance proposal stays in but only as an option, and, most importantly, the government gets equity warrants in case the toxic assets really are as bad as everyone fears. Obama and McCain are both on board.

+ Paul Krugman and Brad DeLong are now openly favoring Swedish-style nationalization instead of the Paulson plan–which, for the record, Yves Smith has been pushing since the beginning–even though Krugman, at least, recognizes that a nationalization plan is political poison until at least after the election.

+ House GOP aides and their sycophantic know-nothing cheerleaders are pleased with themselves for having put a wrench in the works mid-week to make the bill more “free-market friendly” (they are thinking of their insurance proposal), but meanwhile a more realistic appraisal (also from a GOP aide) tells it like it is:

1) This is, essentially, the same bill. Total deal is $700b, which Paulson or next Treasury Secretary can spend the first $250b even if he believes unnecessary. He/She can spend second $450b if thought necessary. A new bill isn’t passed with veto proof majorities to repeal it. This is substantively identical to the original Paulson plan. Congress always had the power to repeal some or all of the authority if it has veto proof majorities.

2) As for Acorn and bankruptcy, they were never in the bill. Dodd/Frank tried to push those in mid/week, they weren’t in the plan already rejected by conservatives on Monday. Even Obama conceded that those provisions would come out. They were simply a red herring, used for extra bargaining power by the left.

3) Lipstick has been put on the pig, and perhaps some Members will be fooled by it, but their constituents will not. I think some political careers will be ended over this.

+ Oh, and remember that AIG bailout? It was probably necessary to keep the credit default swap market from cratering, but it doesn’t make things look any better that it saved Goldman Sachs (Henry Paulson’s old firm) from a $20B loss.

The US has been so hurt by the financial turmoil that markets now view its credit worthiness as akin to - or even worse than - that of McDonald’s, a shocking fact even if you believe that both are fronted by clowns.

One broker quoted McDonald’s CDS at about 26.5 basis points, compared with 30bp for the US, on Friday morning and another desk quoted both about 25bp. The picture has worsened since the news that politicians and public servants in Washington failed to seal a financial bail-out deal on Thursday night. McDonald’s closed at 28bp versus 25bp for the US on Thursday, according to Markit.

How did we get to this point? It’s the culmination of many past betrayals.

First of all, we have the Republican Study Committee blowing things up with a complete nonsense proposal — solving the crisis with a holiday on capital gains taxes. How is that possible? Well, if a party runs on economic nonsense for 25 years, eventually many of its foot soldiers will be people who actually believe the nonsense.

More specifically, though, the failure to get a deal reflects the betrayals of the Bush years. Democrats weren’t going to trust Henry Paulson, because behind him they see the ghost of Colin Powell (and Paulson’s “all your bailout are belong to me” proposal, aside from being bad economics, showed an incredible tone-deafness.)

And after the way the Bushies and their allies double-crossed the Democrats again and again in the aftermath of 9/11 — demand national unity, then accuse you of being soft on terrorists anyway — there’s no way Pelosi and Reid will do the responsible but unpopular thing unless the Republicans agree to share ownership.

So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch.

As a friend said last night, we’ve become a banana republic with nukes.

But if you’re like me you may be wondering what the scale of that toxicity is. How bad are things really?

Now we have a number. Here’s commenter Dan from Yves Smith’s Naked Capitalism blog. (For my fellow humanists: the OIS spread is, among other things, an indicator of how much credit is available out in the world, the bigger the number, the less credit is available, hence an “explosion” is not good; LEH is, or was, Lehman Bros.):

I understand that the explosion in the OIS spread is a reflection of the fear banks have for each others solvency. And it makes sense that it exploded right after the bankruptcy of LEH–it was not the bankruptcy per se, IMO, but the that $110b of senior LEH debt went from trading .95 to .12 in a matter of days that concentrated the market’s attention. If you include the less senior debt that is trading at essentially zero, LEH had $110b hole in its balance sheet….

Now is there a precedent in this history of bankruptcy–excluding cases of accounting fraud–where bonds collapsed like this once a bankruptcy court opened up the books? I’m thinking the answer is ‘no.’ Which then makes you re-evaluate the premise that there wasn’t fraud at LEH in marking the value of their assets.

Now extrapolate this reasoning across the entire banking system and, voila, you have the seizure of the interbank lending market.

And the really bad news is that the bailout, even if it were to pass, wouldn’t fix this problem:

Now this leads me to the question: if the OIS spread represents eminently legitimate fears of inaccurate marks on banks books, how is a commitment from the treasury to buy hundreds of billions of distressed assets from the banks any assurance to a counterparty that that bank will not still become insolvent. Obviously it helps on the margin, but the staggering hole in LEH’s balance sheet that was revealed after bankruptcy creates profound fears about the true solvency of C or UBS. Until the market is convinced they are solvent–and TARP does not do this–the OIS spread will remain elevated and lending will remain frozen.

Scary stuff.

And on that note, I really can’t recommend Naked Capitalism highly enough as the place to go if you want to try to keep a handle on what’s happening these days in the economy. If you haven’t been tuning in there lately, the short version is that Smith believes we are in for a pretty massive shrinkage of the economy (on the order of 4-5% of GDP) no matter what anyone does or does not do in terms of bailouts. He’s a critic of the Paulson-Dodd plan, not because of the preposterous reasons adduced yesterday by House Republicans, but because he’s convinced that the Paulson plan will lead us down the (unsuccessful, and very painful) path of the Japanese crisis of the 1990s rather than the (successful, though still painful) path that Sweden took to handle its crisis in the 1990s. What’s more, Smith argues that the scale of the financial mess is simply too big for the U.S. government to try to prop up. The other day he posted an estimate by Ken Ohmae that it would take $5 trillion to really set things straight–money, needless to say, that the US doesn’t have and can’t get.

BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

(Source: Reuters)

Instructions:

1/ Print.
2/ Trim.
3/ Deliver to the nearest free-market absolutist. If none are ready to hand, mail it to 1126 E. 59th Street, Chicago, IL 60637.
4/ Repeat as necessary.

(Image by Jessica Hagy.)

Tony Fratto, Mr. Bush’s deputy press secretary, said Mr. Cheney and others hoped to reassure the critics that the proposal is an emergency response to a critical problem, and not an “abandonment of the belief that our markets work and our free market system works.’’