Song and Dance before November

The Federal Reserve Bank, a private institution, is spreading money around Wall Street to keep the financial system and therefore, the economy afloat. Even though The Fed is not a federal government institution, we, the tax payers, are on-the-hook for the massive lending via the new lending window. What's a lending window? Its a place and a method to borrow money directly from the Federal Reserve. Why is the Fed doing this? They believe the financial system is gummed up so badly that lending tens of billions of dollars is prudent and necessary to keep the investment banks solvent and prevent a total freeze on new loans.
Why don't we let the greedy bastards fail? This reason: the retail banks, investment banks and insurance companies are all tied together by the mostly complete elimination of the Glass-Stegal Act. This act of Congress, from about 1933, was written into law in reaction to the banking crisis of the Great Depression. Since the repeal, credit default swaps, a form of insurance that is not called insurance to skirt regulation, became a way to reduce risk on the part of a lender. If I lend a company, say 100,000 dollars, I can by a CDS, credit default swap, from another institution as a form of insurance in case the borrower defaults on the loan. If done correctly and with integrity, a CDS can be a good way to reduce risk associated with lending. The fishy part comes in a couple of ways: lenders can lend to less qualified borrowers and the sellers of the CDS can re-sell the credit default swap.
So we have a way to decouple risk from lending. The best example of this going wrong is in the meltdown of the sub-prime mortgage industry. The house of cards starts with a loan broker writing a loan to a borrower who will never be able to continue payment when the interest rate resets to the higher rate. Then the bank that lent the money re-sells the loan to another bank or investor, like a pension fund. Since the quality of the loan is no longer an issue, someone else approved it, the loan can be bundled with other debt and this new bundle carries the rating of, well, the best of the bundle, not a rating comenserate with the mix of loans it is comprised. So where does the CDS come in? In the chain of re-selling and re-packaging of these loans, each of the sellers can buy this, we do not call it insurance, CDS to cover the risk of the loan or loan bundle.
And this is bad because? We have removed and given the risk lending to unqualified customers to someone else. Here is where the scammers come into the picture. A loan broker lends money to someone who can never repay the loan. The broker gets a fat commision when escrow closes, a bank gets a loan which has a time bomb attached. A broker has a built-in conflict of interest, make the loan, and get a commision, do the right thing, deny the loan, make no commission.
Because of overuse of the credit default swap, we have a large, huge part of the financial industry playing a game of make money up front, pass the bad loans onto someone else.
How do we fix this mess? Bringing back Glass-Stegal is a start. We may have to nulify the CDS contracts to get risk sent back to the originator. This is extreme and will cause problems. Consider the fact that the dollar value of all the CDS contracts vastly exceeds the value of all lending!
Enough for now.