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Why some firms are bailed out and others ignored

Those sinking in the wake of the real estate plunge get different treatment. For the overall economy, it makes sense.

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Moreover, AIG has a huge business in China, which owns some $1.8 trillion of US Treasuries, and is active in other nations in Asia. So an AIG bankruptcy would have been upsetting not only inside the US.

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Actual losses in US housing depend partly on whether the US slips further into recession, as Wray expects. Consumers are already becoming more cautious as unemployment rises, their home and stock-market wealth declines, and credit becomes harder to obtain. Losses also hang on whether mortgage holders give homeowners more time or easier terms to manage their debts.

The crisis is widely expected to lead to tighter regulation of the financial markets. "We have to," says James Galbraith, an economist at the University of Texas, Austin. He charges that there has been a "systematic destruction" in the quality of regulation of the nation's financial system. "The center of the world's currency system has been run irresponsibly and fecklessly," he says.

Both presidential candidates are talking about reform of the financial system. Voters will be left to decide which of them is more credible in this area.

Though not spelling out specific details for tightening regulation, Mr. Galbraith holds that any new rules must stop "sharp practices and buccaneering."

Wray gets more specific. Banks should not be allowed to put liabilities in special-purpose accounts off their regular balance sheets, an amount he estimates at $10 trillion. "Regulators should know exactly what their liabilities are," he says. That includes some of the $18 trillion or so in credit-default swaps held by banks, out of a total of about $50 trillion. Wray adds that some insurance companies may not hold any reserves at all against such massive liabilities.

Further, he maintains that banks should not be allowed to leverage their investments to such extremes as 30 or 40 times their own capital. Under Basel Accord II, a 2004 agreement covering banks in much of the world, banks are supposed to limit their investments to about 12 times their own capital. But the investments were risk adjusted, and investments based on mortgages were considered safe. That assumption, of course, proved false, leading to the shaky position of some banks today.

Regulators had become "very sloppy" on bank reserve requirements against liabilities, says Frank Genovese, an economics professor emeritus of Babson College in Wellesley, Mass. He suggests that judges charge financial institutions large fees to foreclose on a property. That move would encourage banks to work out better mortgage deals with homeowners. If not, it would provide municipalities with extra revenues.

Many economists worry that further financial troubles ahead could arise from home equity loan defaults, a multiplication of commercial bank failures, a huge price slump in commodities, or more fancy financial derivative failures.

If such further troubles do arise, the institutions will still likely seek government help. As a new saying in the financial community goes: "Just as there are no atheists in foxholes, there are no libertarians in a market collapse."