It was the end of the worst week for financial markets since 1929, Nobody understands who owes what to whom — or whether they have the ability to pay.

Nobody understands who owes what to whom — or whether they have the ability to pay.
We told you about inability to prove ownership of mortgages last year--listen to our News Review tonight.
He acknowledged that it would likely cost taxpayers “hundreds of billions of dollars.” I think it will cost more than $1 trillion.
Talking Business
Hoping a Hail Mary Pass Connects
Joshua Roberts/Bloomberg News
Henry Paulson at a news conference to announce an insurance program for money market funds.
'The solution proposed by the Treasury, like the football play, is not very likely to succeed.'
By JOE NOCERA
Published: September 19, 2008
It was the end of the worst week for financial markets since 1929, and Treasury Secretary Henry M. Paulson Jr. looked sleep-deprived.

He had begun the week agreeing to let Lehman Brothers go bankrupt, arguing that the government had to stop putting taxpayers’ money at risk. Then, midweek, he brokered a deal to rescue the American International Group with an $85 billion loan from taxpayers — arguing that the risk to the financial system was too high to allow the world’s biggest insurer to fail.
Neither move had done anything to stop the financial tsunami. So on Friday morning, just as the markets were opening, Mr. Paulson unveiled the government’s latest attempt to stop the bleeding. Maybe it was because he was so tired, but there was none of the glass-half-full blather that is de rigueur for a cabinet secretary. Instead, his flat, just-the-facts-ma’am voice and weary body language conveyed an unusual sense of urgency.
The core issue, he said — the mistake that had led to all the other mistakes — was that “lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing.” True. As for Wall Street, toxic mortgage-backed securities had become “frozen on the balance sheet of banks and financial institutions.” He added, “The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.” True again.
And that really is the crux of the matter — the financial system has seized up.
But so far, the government’s actions haven’t helped.
Letting Lehman go bust may have sounded good at the time, but it has had disastrous consequences.
It has led to complete chaos in the multitrillion-dollar market for credit-default swaps and was a crucial reason Morgan Stanley was forced to scramble to stay alive this week.
It is also why questions were raised about the viability of Goldman Sachs, a firm with a pristine balance sheet and almost none of the bad assets that are bringing down other firms.
The rescue of A.I.G. further undermined confidence because, within the space of several days, the government did a complete about-face.
The bailout suggested the Treasury Department was as confused about what to do as the rest of us.
So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem in the market right now: an utter lack of confidence.
Nobody understands who owes what to whom — or whether they have the ability to pay.
Counterparties have become afraid to trade with each other.
Sovereign wealth funds are no longer willing to supply badly needed capital because they no longer know what they are investing in. The crisis continues because nobody knows what anything is worth.
You simply cannot have a functioning market under such circumstances.
Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday, but I’m not hopeful. One solution being promoted by the Securities and Exchange Commission — to make life more difficult for short sellers — is a shameful sideshow.
A second solution, which Mr. Paulson announced Friday morning, requires money market funds to create an insurance pool to cover themselves against losses.
That may provide comfort to investors who equate money funds with savings accounts, but it is fraught with moral hazard.
And the third solution — the big megillah — is Mr. Paulson’s plan to create a new government mechanism to buy mortgage-backed securities from big banks and investment houses.
Once they are off those companies’ books, life can return to normal — or so Mr. Paulson hopes.
He acknowledged that it would likely cost taxpayers “hundreds of billions of dollars.” I think it will cost more than $1 trillion.
It is a weird tribute to the scale of this crisis that Mr. Paulson felt he had no choice but to rush this proposal out, because as the day progressed it became increasingly clear that the Treasury Department didn’t yet know how this mechanism was going to work. It is an idea of a plan more than an actual plan. In football, they would call it a Hail Mary pass. Sometimes, of course, a Hail Mary pass is completed for a touchdown. But most of the time they fail.
Let’s take a closer look at the government’s latest response.
KILL THE SHORT SELLERS It’s understandable why people get upset at short sellers in tough times. As President Bush put it Friday, short sellers are “intentionally driving down particular stocks for their own personal gain.” But that perception is more myth than fact, and in any case, it’s not the dynamic here. Stocks are falling because companies made huge mistakes that have caused them a heap of trouble. Indeed, in July and August, short interest in financial stocks declined by 20 percent. Why did the stocks continue to go down? Because there were too many sellers and not enough buyers: it’s that confidence thing again. Blaming the shorts is classic blame-the-messenger behavior.
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September 20, 2008, on page C1 of the New York edition.