From Fed Chairman Bernanke's speech yesterday in Phoenix ...

Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.

It's all about the budget this weekend, as President Obama promotes his proposal in a YouTube message and activists go door to door signing up supporters. That and other political news in today's TPMDC Saturday Roundup.

Geithner bank plan is as bad as advertised.

Photogallery: Michelle Obama takes first trip as First Lady.

From The Tennessean ...

The Nashville-based subsidiary of insurer AIG is dropping those tarnished initials, a rebranding that separates it from its troubled parent and, officials say, highlights its individual identity.

In coming weeks, a new sign that emphasizes the initials of the unit, American General Life and Accident Insurance, will replace the one outside of its Brentwood-area headquarters that read "AIG American General" until the parent's name was covered up this week.

...

"Moving to a brand that the company built its reputation on and that doesn't immediately bring to mind AIG certainly helps with new business sales," she said.

GOP candidate Tedisco is great! According to ... Tedisco.

Senate Republicans not digging the bonus tax bill.

GOP re-dubs carbon emissions cap-and-trade as "energy tax."

Jim Tedisco, the GOP candidate in much-watched NY-20 special election was just forced to walk the Rush plank after making ambiguously loyal comments about El Rushbo.

We've been back and forth on this issue for the last couple days: can we manage the risks involved in letting some of the big banks and other financial institutions go into some sort of managed reorganization?

This afternoon on MSNBC NJ Gov. Jon Corzine -- who, remember, used to be CEO of Goldman Sachs -- says yes, we can and we should. We know much more about the condition of the banks and the implications of their (controlled) failure than we did in the crisis moments last September.

J Street director Jeremy Ben-Ami sat down with TPM news editor Justin Elliott this week in Manhattan to discuss the group's role now that Barack Obama is President. Among other things, Ben-Ami defends J Street's decision to sit out the battle over the administration's National Intelligence Council pick, Chas Freeman, who withdrew after he was vilified by the right-wing pro-Israel community:

This is almost too silly for words, but since others have been writing about it today, let me update you, too. I'm pretty new to the world of Twitter, so I was a bit surprised (but mostly amused) when ABC's Jake Tapper blocked me from following his Twitter feed after my post this morning knocking his reaction to the Obama Special Olympics gaffe. Others were blocked, too, although it's not clear to me exactly why. In any event, Tapper, in what I guess is a Twitter equivalent of a peace offering, started following my Twitter feed this afternoon, and I am now able to follow his again. He twittered: "tpm is unblocked. My bad"

Now back to the economy collapsing around us.

From TPM reader JS ...

Nearly everything reader MH writes is, to greater or lesser degrees, incorrect.  Might as well have been written by Vikram Pandit. 

I don't have time to get into this right now, but attached is a very good description of what went down in the fourth quarter of 2008, including a detailed account of exactly what happened after Lehman failed.  Note that a lot of the CDS/counterparty issues were resolved over the weekend before they let LEH go, and that since then the Fed has put in place liquidity backstops that prevent many of the post-LEH consequences from recurring even in the event of another major bankruptcy.  Taking the big money-center banks into receivership would indeed be an exceedingly complex task requiring considerable preparation, much of it done in secrecy.  but it can be done.

Minnesota Dem spokesman: Refreshing to see Coleman team telling the truth.

TPM Reader MH makes the case that Lehman's collapse was really that bad and we can't let it happen again ...

The problem that the Lehman Brother's bankruptcy exposed is that, in these complex derivative investments, it's not always clear where the counterparty risk lies.  These transactions are non-traditional in structure and so its often not clear how bankruptcy rules will apply to them. There's very little relevant case law and these transactions just weren't designed with much thought toward this contingency (no one imaged that these large couterparties could ever fail).  Things don't fit neatly into statutory boxes, so it's not clear what the bankruptcy court will do and who will end up getting their money back.  So when Lehman went bankrupt, everyone had to try to assess the degree to which they were exposed to the potential bankruptcy of other major counterparties.  And that's really hard to do with any accuracy.  That's why everything froze up.  No one could get an accurate assessment of their own exposure.

The fear people have now--and justifiably so, I think--is that the only thing keeping the financial system functioning at all right now is the assumption that the major governments of the world will not allow any other major counterparties to default.  If even one of them is allowed to fail, that assumption immediately goes out the window and suddenly everyone will have to assume that any major counterparty could fail at any moment.  If that happens, everything will grind to a hault again.

A great exchange on CNBC between the anchor and Rep. Brad Sherman (D-CA), one of the few elected voices of reason during the financial crisis:

It's highly technical. And it's really hard even for the experts to figure out, let alone those of us who stick to simple addition and occasional division. But with all the conversation about AIG, it's worth focusing our attention back on just how much of the current debate -- and the approach we're taking -- revolves around what happened to Lehman Brothers.

In short, last September, the Fed & Treasury 'allowed' Lehman to collapse into bankruptcy and global credit markets seized up into a global spasm that kicked the global financial crisis into really high gear. We hovered on the edge of real cataclysm and managed to work our way back to mere global crisis over a period of a couple months.

It's the Lehman experience which is behind the widespread and possibly accurate assumption that we have no choice but to pay back all the creditors and counter-parties of the big -- and probably insolvent -- banks at full dollar value.

But is the assumption correct?

There's one debate about whether it was really Lehman's collapse or the Treasury's reaction to it that caused the crisis. In as much as I'm able to understand the different arguments, this one seems pretty unconvincing.

But that's not the only question.

Lehman went under when there was much less widespread recognition of the extent of the financial crisis. And -- perhaps much more importantly -- it was done in a totally uncontrolled way. There was no effort to engineer some sort of managed receivership.

Now, a number of the smartest economists I know and whose judgments and values I really trust, think that the abyss we were looking into was so deep and vast, that it's just not worth chancing it. But there are very sharp people who make contrary arguments.

I don't have any answers on this one. But for those of us who are spectators and involuntary stakeholders in the drama, it is worth remembering just how many dollars ride on interpretations of the Lehman experience.