How will the stabilization plan take shape?

I wrote the following in response to a friend's email:

How will the stabilization plan take shape?

In the US, following the mode of the RFC (Reconstruction Finance Corporation) would put the government in a tough spot in choosing which banks to keep and which to fail. I believe that was one of the sticking points as the rescue bill was negotiated, where congressmen were pressed hard by community banks for some protection, which aren’t too big to fail. (I think that the raising of FDIC insurance limit, which really wasn’t the real problem, was one of the things they fought for.) But clearly, with what happened on Friday to the Big 3 commercial banks (didn’t see Wells Fargo’s stock), perhaps there is already a preference for which ones to prop up. Nevertheless, the nationalization of banks would dilute current outstanding shares and drive down the stock price. Perhaps the first to be injected with government capital, or even nationalized, could be Morgan Stanley, especially if the Mitsubishi UFJ bid fails or is deemed inadequate.

More crucial is that some quick and credible actions must be taken shortly globally. The capitulation was delayed, which might have taken place on Friday, had that unknown intervention did not happen after the quick 600 point drop in the Dow just after the open. What little confidence left in the market could be gone if market players believe that even the G7 cannot come up with something to right the market and system. If that happens, the consequence could be ugly. The government could keep propping up the market, just like Taiwan did for the past few years, to buy some more time. One success story was Hong Kong during the Asian Financial (Currency) Crisis, where it stepped in to buy stocks. But then HK’s reserve was very large and that speculators were massively shorting stocks, not being forced to sell like what we have now.

Perhaps the US, G7 and such have to ask the Middle East, China, Japan and others with large reserves to join in to help invest or nationalize banks and corporations. Those countries would probably agree, as none of them want to see recessions in the US and Europe to be deep and long. Foreign ownership restrictions would have to be waived. While the US could ask them to buy more treasuries instead, those countries would likely want to ask for more say in return, where a simple ownership of treasuries would not achieve.

Challenging times indeed.