Merrill may have to write off another $15 billion for Q4.

If the Fed and Treasury want to do something for banks, mortgage companies, and investment houses, they can stop lending them money. In some ways access to capital only makes matters worse. Ready capital allows the companies to look to quick write-offs. Clean up the books. Hope for a 2008 rebound.

One radical proposal would be to allow big financial institutions to defer writing off parts of their portfolios which are illiquid. Those could be defined as securities in which their is no ready market. Financial instruments backed by certain mortgages would be an example.

One of the reasons that sovereign funds look at buying banking shares is that they are willing to wait two or three years to see if asset values on troubled paper improves. The Citadel bet at E*Trade (ETFC) was based on this thinking

Sovereign funds putting dollars into Citigroup (C) and Merrill Lynch (MER) are assuming that there will be a partial marking up of troubled assets. If it happens, earnings could bounce back in late 2008 or 2009.

The Fed could allow the process to occur through a deferral of write-downs. Or, it can throw money at the problem.

Douglas A. McIntyre

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