New York Times op-editorialist Paul Krugman got one right today. And its Floyd Norris points out why the solution to the problem Krugman highlights could be SWFs (Sovereign Wealth Funds). Krugman does not know how much the financial industry's problems will cost and Norris suggests that SWFs -- government investment funds -- are worth between $2 trillion and $15 trillion.

Krugman's right that the Fed's four attempts to reboot the financial system have not worked because they dance around the most fundamental problem -- nobody knows the depth of the financial hole. If I was in charge, I would find out where all the toxic waste is buried and estimate the amount of capital needed to offset the cost of writing it down. In my view, it makes sense to mark the toxic waste to market and to raise capital at the same time.

Norris points out that SWFs could be part of the capital raising solution -- as they have been in the cases of Citigroup Inc. (NYSE: C) and UBS AG (NYSE: UBS). He also suggests two pitfalls of SWFs as a source of capital. First, they are government controlled which could allow the SWFs to use the resulting power over our financial institutions to further their political ends. Second, whenever a new acronym such as SWF emerges in the financial world -- and there have been plenty including Collateralized Debt Obligation (CDO) and Structured Investment Vehicle (SIV) -- Wall Street will find a way to profit from it in the short-term while sticking the long-term costs on someone else.

The proposed Super SIV may end up being considerably smaller than the original outline, as banks and other SIV-owning institutions either write-down or find other ways to dispose of problematic SIV assets, The New York Times reported Monday.

Conceptualized following a request from the U.S. Treasury, the Super SIV is designed to facilitate the orderly sale of high-risk packaged mortgage loans and assets held by SIVs, but not to rescue those SIVs.

As presently configured, beginning in January/February 2008 the Super SIV will lead a coordinated, gradual purchase-and-resale of these assets, which, officials say, will avoid a "mad rush to the door" of SIV asset sales. The latter would further depress prices, and create another round of credit market turmoil, with negative consequences for the U.S. economy. The Super SIV will raise money from financial institutions to fund itself.

Bloomberg News reports that HSBC Holdings Plc (NYSE: HBC), Europe's largest bank, has decided to rescue its own $45 billion worth of Structured Investment Vehicles (SIVs). HSBC's plan lowers the odds that Hank Paulson's Super SIV plan to rescue the $320 billion SIV industry -- whose values Fitch reports have declined to 70% of their stated worth -- will succeed. The implications for Citigroup Inc.'s (NYSE: C) $80 billion worth of SIVs are also potentially scary.

Specifically, HSBC will sell bonds to finance the purchase of two SIVs -- Cullinan Finance Ltd. and Asscher Finance Ltd -- taking on their $45 billion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). By August 2008, HSBC expects to provide the new company that buys the SIVs' assets with $35 billion worth of funding and loan facilities, thus removing the risk of a forced sale of the SIVs' assets because of declines in the net asset values. HSBC says, however, that investors will still bear the losses stemming from defaults in the underlying assets.

It seems to me that HSBC's move could have an impact on the Super SIV intended to bail out Citigroup. By encouraging the prompt sale of the SIVs, CDOs and MBSs, HSBC could provide a model that others may follow. If successful, HSBC's approach could supersede the Super SIV plan. I'd prefer to see the banks bail themselves out, rather than relying on the government.

With the three largest U.S. banks reaching agreement on a new $80 billion fund aimed at reviving the market for short-term debt, criticism appears to be mounting that the new fund itself may be flawed or may create more problems than it solves.

Citigroup (NYSE: C), the Bank of America (NYSE: BAC). and JPMorgan Chase (NYSE: JPM), the three largest U.S. banks, have reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said, Bloomberg News reported.

The banks want to establish the fund, called the "Super SIV" or master liquidity enhancement conduit ("M-LEC"), as a way to obtain short-term credit to finance high risk / high-yield investments in subprime mortgage loans. The fund would buy some of the $320 billion in assets held in structured investment vehicles, or SIVs. SIVs typically borrowed money to invest in longer-term investments, like subprime mortgages.

I've been talking about the Super SIV bailout plan since the plans for the fund first became public October 14. Today The Wall Street Journal is questioning whether the Super SIV bailout fund can be funded in time [subscription required] to help struggling SIVs who need to find investors for $100 billion in debt coming due in the next six to nine months. The Journal reports some of the biggest SIV operators already are selling their assets, including Citigroup (NYSE: C), the Super SIV champion and the operator of the largest chunk of SIVs, and Rabobank of the Netherlands. Moody's Investor services continues to downgrade the types of assets held by the SIVs, especially assets based on subprime mortgages in the U.S.

Why should you care? You may be holding a money market fund or mutual fund that holds debt from these SIVs in trouble. If the bailout doesn't arrive in time, SIVs will have to restructure their debt, wind down, or in the worst-case scenario become unable to pay their debt investors. When the Journal first started talking about this mess, it reported SIVs held $400 billion in assets globally. Today, because of the write-downs and sale of assets, the Journal is estimating the total value of SIV assets at $350 billion.

While many thought the "Super SIV" fund might be an unrealizable goal, the Wall Street Journal indicated on Saturday that as much of $60 billion of the hoped for $100 billion [subscription required] may actually be promised. Citigroup (NYSE: C) is leading the charge,with help from Bank of America (NYSE: BAC) and JP Morgan Chase (NYSE: JPM). These three banks will fund as much as half of the fund. Citigroup has the most at stake because it owns about $100 billion of the $400 billion in SIVs globally.

The Journal reports that the group has gotten about a half dozen takers promising between $2 and $7 billion. They're hoping to get up to five major Wall Street firms to kick in about $2.5 billion a piece. Lehman Brothers Holdings Group (NYSE: LEH) and Merrill Lynch & Co. (NYSE: MER) supposedly have committed to be involved, but neither firm has committed to a specific amount,according to the Journal.

Wachovia (NYSE: WB) has promised to step up and its commitment is expected to be between $2 billion and $7.5 billion. Wachovia said it does have some SIVs on the books, but it is not a major holder of SIVs. HSBC, which is a major holder of SIVs, is targeted as a major contributor with a contribution between $5 billion to $15 billion. Dresdner informally committed to $3 billion. HSBC and Dresdner combined are thought to hold $64 billion in SIV-related debt. Other non-U.S. banks will be approached for funds, including the Bank of Montreal, Barclays PLC, Royal Bank of Scotland Group PLC and Standard Chartered PLC.

If they are successful in putting together even a $60 billion fund, it will be the largest credit line in the history of the world. Prior to this Super SIV, the record was held by three European companies who put together a $48.6 billion credit line for the acquisition of E.On AG, according to Reuters Loan Pricing Group, the Journal reports. Bank of America has the lead for rounding up participants, with the help of JP Morgan Chase.

The New York Times [registration required] reports that Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) are working with the Treasury Department to create a $75 billion fund to bail out Structured Investment Vehicles (SIV) -- of which there are thought to be $400 billion worldwide. What are SIVs? Why do they need to be bailed out? Why is the Treasury Department getting involved? Will the bailout plan work? Why should you care?

Before addressing these questions, it's worth pointing out that Hank Paulson, the current Treasury Secretary and former Goldman Sachs Group (NYSE: GS) CEO, has not had much success as a government servant. His efforts to talk China into loosening its currency have fallen flat. And a high-level government source told me that Paulson's brusque personal style has not endeared him to other economic policy makers.

When Paulson took the job in May 2006, I speculated that the reason he took it was so he would have the chance to outshine Robert Rubin, another former Goldman executive, whose tenure at Treasury was widely perceived to have been brilliant. I thought then that Paulson thought a financial crisis would occur under his tenure that would enable him to demonstrate his financial crisis management skills. The SIV crisis is a big problem but I doubt he'll rise to the occasion like Rubin did.