Nouriel Roubini has a characteristically scathing takedown of the Paulson plan, and here’s the thing: language aside, his economic analysis is similar to mine. The fundamental problem in the financial system is too little capital; bizarrely, the Treasury chose not to address that problem directly, by (say) purchasing preferred shares in financial institutions. Instead, the plan is premised on the belief that toxic mortgage-related waste is underpriced, and that the Treasury can recapitalize banks on the cheap by fixing the markets’ error.

The Dodd-Frank changes make the plan less awful, mainly by creating an equity stake. Essentially, this makes it possible for the plan to do the right thing through the back door: use toxic-waste purchases to acquire equity, and hence inject capital after all. Also, the oversight means that Treasury can be prevented from making the plan a pure gift to financial evildoers. But it’s still not a good plan.

On the other hand, there’s no prospect of enacting an actually good plan any time soon. Bush is still sitting in the White House; and anyway, selling voters on large-scale stock purchases would be tough, especially given the cynical attacks sure to come from the right. And the financial crisis is all too real.

So is it better to have no plan than a deeply flawed plan? If it was the original Paulson plan, no plan is better. Dodd-Frank-Paulson may just cross the line — let’s see what details we have if and when agreement is reached.

If the plan looks not-awful enough, I’ll be pro. But I won’t be cheering — I’ll be holding my nose.

Mortgage help for bankrupt homeowners dropped

By JULIE HIRSCHFELD DAVIS and DAVID ESPO, Associated Press Writers

Fri Sep 26, 7:54 PM ET

House Democrats say the idea of letting judges rewrite mortgages to help bankrupt homeowners avoid foreclosure won't be a part of the $700 billion financial industry bailout.

Speaker Nancy Pelosi, D-Calif., told Democrats at a closed-door meeting Friday evening the provision would be a deal-breaker for Republicans who she has said must deliver substantial votes for the rescue plan. That's according to several lawmakers who attended the session.

Democratic presidential nominee Barack Obama had said earlier that the measure didn't belong in the bailout.

The concession came as staff aides to key Democrats and Republicans worked into the evening searching for compromise on the rescue bill.

Blame Game Begins on Capitol Hill

Lehman Brothers Execs Tell Congress They Didn't Keep Documents

By RHONDA SCHWARTZ

September 26, 2008—

While the country waits anxiously for Congress and the White House to agree on a plan to prevent economic collapse, others on the hill are already searching for whom to blame.

House Oversight Committee Democrat Henry Waxman has already summoned the former chief of Lehman Brothers, the failed investment bank whose collapse stunned the nation last week, to testify under oath before his committee next week.

And late today, Waxman publicly blasted the former Wall Street titans for not cooperating with requests for documents and emails, saying Lehman's counsel has told the committee "although these documents did exist at one time, they were typically "discarded.""

"It is difficult to understand how Lehman Brothers is unable to produce a single internal document that went to or from the CEO's office over the past six months," the letter stated. "It is also difficult to understand why there is no log, file, or other record documenting where these internal documents went."

Lehman Brothers did not immediately return a call from ABC News seeking comment.

Separately, an audit requested by Republican Senator Charles Grassley was released Friday, offering a highly critical report of the Security and Exchange Commission's own leadership.

The audit said officials failed to act in the face of potential red flags or take action against Bear Stearns' "concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain" international standards.

"It is indisputable that the CSE program failed to carry out its mission in its oversight of Bear Stearns," the report said. "The audit found that procedures and processes were not strictly adhered to."

Grassley responded Friday said the report is "another indictment of failed leadership."

All this comes before an agreement on how to save the nation's economy has even been settled.