The markets could have changed their name to 'Yo-Yo' today rather than 'Skydiver.' It wasn't the VIX reaching multi-year highs of 40 that ran us up. It wasn't last night's intervention. It was the first overseas curbing of short selling financial stocks in the U.K. and then the word that the government was preparing a new version of the Resolution Trust Corporation.

Dow 11,010.74 +401.08 +3.78%
Nasdaq 2,199.10 +100.25 +4.78%
S&P 500 1,202.86 +46.47 +4.02%
10 Yr Bond(%) 3.432% +0.022%

52-week lows
Top Analyst Upgrades & Downgrades

Washington Mutual Inc. (NYSE: WM) was a huge winner today. Shares were up over 50% at $3.17 right before the close after it has formally put itself up for sale. The rest of the rally came from government hopes of a new RTC.

American International Group (NYSE: AIG) also saw a monster run. Shares rose 20% to $2.45 on more than 200 million shares. Tie that one to a possible RTC as well.

The head of the Senate Banking Committee has indicated that the U.S. Federal Reserve has the authority to create a new 'debt fund' to buy, warehouse and dispose of distressed / bad debt resulting from the subprime mortgage crisis.

"The Fed has the authority to move in this area," U.S. Sen. Chris Dodd, D-Connecticut and chairman of the committee, told Bloomberg News.

Many economists and analysts argue that a step integral to stemming the cycle of foreclosure / housing price decline / bad bonds / stock run / collateral call / bankruptcy is for a special agency to buy up and strategically restructure, then sell, distressed / bad assets. Economist Peter Dawson is one of those economists who favors the tool.

"Ideally, you'd like to have a private-sector consortium of banks or other financial institutions to coordinate the effort, but right now there aren't exactly a lot of banks stepping up to the plate to take a swing," Dawson told BloggingStocks Thursday. "There's a considerable amount of fear in the market, frankly, and banks are hoarding cash. If this remains the case then we'll need a public sector effort to put this new institution in place."

A friend and colleague of yours truly, economist David H. Wang, frequently speaks with family and friends from his native China. One of the observations he's been hearing recently goes like this: "Strange, new form of pure capitalism you have in the United States that bails-out every company."

Well, as Wang pointed out, it's not every company, and in point of actual fact, the United States is a mixed capitalist system -- private sector-based, but with a social welfare safety net.

Still, the reality is that had the U.S. Federal Reserve not offered an $85 billion loan to American International Group (NYSE: AIG), given AIG's counterparty, pension, investment fund and related relationships, "the global financial system would have frozen-up," or "experienced a level of stress we haven't seen since the stock market crash of 1929," Wang said.

The Fed's action was the 'Greenspan Doctrine squared:' AIG was not only 'too big to fail,' it was 'too interconnected to fail.' So one can see why Fed Chair Ben Bernanke and U.S. Treasury Secretary Henry Paulson put in motion another 'loan of epic size' for a private company.

Confidence in the global economy fell in September, as concern mounted about the health of the U.S. economy and global financial system following the bankruptcy of Lehman Brothers and the near bankruptcy of AIG, which prompted a U.S. Federal Reserve intervention, a new survey indicated.

The Bloomberg Professional Global Confidence Index fell to 11.3 in September from 14.1 in August among U.S. respondents. The Western European index fell to 12.6 from 12.9. Readings below 50 indicate negative sentiment.

Economist Richard Felson, who did not participate in the Bloomberg survey of 3,000 Bloomberg Terminal users, told BloggingStocks Wednesday too many financial concerns and bankruptcies are occurring over a short period for business professionals to be positive.

"Countrywide, Bear Stearns, Indymac, Freddie, Fannie, Lehman, Merrill, and now AIG. Wow, that's an awful lot for any economic system to absorb in five years, let alone one year," Felson said. "Executives and other business professionals are justifiably concerned about credit access for business operations and about declining demand due to rising unemployment. The major U.S. economic metrics are not moving in a positive direction right now and the nation needs to correct that."

In a way, we are seeing a replay of the 1980s: we are dealing with the consequences of a credit bubble as banks teeter and the economy slows down.

In today's Wall Street Journal [a paid publication], there's a great piece from some of the veterans of that era from former US Treasury Secretary Nicholas Brady, former US comptroller of the currency Eugene Ludwig, and former Fed Chairman Paul Volker.

They don't mince words. Simply put, they think the U.S. financial system is on the brink, and if action is not taken, we may see "the mother of all credit contractions."

What can be done? Interesting enough, there is a precedent: the Resolution Trust Corporation (RTC). This was a strong organization that allowed for the smooth unwinding of the S&L industry during the early 1990s.

Essentially, the RTC had full backing and a clear mandate. And when it completed its job, it actually closed down (yes, that's something that rarely happens with a federal agency).

As for the current situation, an RTC organization would be a buyer of distressed securities. Ultimately, this will encourage more trading, liquidity, and hopefully, more economic activity -- especially in the housing sector.

Unfortunately, policy makers are currently taking an ad-hoc approach, putting out one fire after another. How can this engender confidence? If anything, investors are waiting for the next financial institution to implode, which just becomes a vicious cycle.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

Our government has been doing its share of bailouts in the last year. It put $29 billion of taxpayer money at risk to finance the takeover of Bear Stearns. It stands ready to use $800 billion to bailout Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). And now General Motors (NYSE: GM) wants $50 billion in government guarantees to finance fuel efficient cars. I have been looking into the bailout issue and whether it is beneficial or a misuse of funds - and there is a lot of debate about this issue. These bailouts may make political sense but are they in the long-term economic interests of the country?

A colleague of mine who was a Budget and Cost Analyst for a top government agency has been thinking about the political aspect of bailouts and shared his thoughts with me. As he wrote, "It is a sure thing that either party could get votes from a bailout, but they might loose some as well. Where a party could really improve its position would be to support a bailout, but lose."

He suggests that this outcome would pay off in the short-run but could damage long-term economic outcomes. As he suggested, If the party supported a bailout but lost, "it could claim that it was trying to support the victims, but had been frustrated by the other party. And this could be used to promote the party for many years in efforts to get votes. While maneuvers of this sort may get short run votes, over the long term they might be hurtful of sound economic growth and performance."

Those investors/readers who are of the persuasion that the U.S. stock market is about turn the corner should heed the words of caution from legendary banker Bill Seidman.

"There's always a chance of a large bank failure," Seidman told Newsweek. Seidman chaired the Resolution Trust Corporation, the federally-created liquidator for the last banking crisis in the 1980s.

Keep an eye on the big banks

A large bank failure would quickly extinguish what little momentum the market has established from mid July to early August, during which the Dow Jones Industrial Average has risen from about 10,850 to 11,734. Economist David H. Wang said he will not attach a more-positive descriptive to the 884-point move, because he "doesn't want to create unreasonable, and unjustified, expectations."

"First, our technical analyst friends would say the recent move up is still well within the range of a bear market correction," Wang said. "Second, from a fundamental standpoint, we still have major headwinds."