From last night’s Kennedy Center birthday gala for Sen. Ted Kennedy (D-MA), with a surprise appearance from the President:

See more at CBSNEWS.com.

Samuel “Joe the Plumber” Wurzelbacher denounces Michael Steele.

Everything else is in deficit. But completely moronic questions/points from Mark Halperin remain in historic surplus. The latest is, isn’t Obama distracting himself from the economic crisis by taking five minutes to sign an executive order on stem cell research?

Sen. Reid (D-NV) recommends fired Nevada US Attorney Bogden get his old job back under Obama.

In all the debates we’re having about what to do about the banks we don’t seem to focus enough (at least not in the popular press) on the fact that almost all the questions come back to a single question: what to do about the bondholders. As that J.P.Morgan report we referenced this morning put it, government policy to date has largely been focused on making sure that bondholders do not lose any of their money.

So let’s draw back and consider what this all means and whether it makes sense.

If you’ve got a big insolvent bank and you need to make up a big hole on the balance sheet you’ve got, broadly speaking, four groups of people you can get the money from, or put a different way, who can take the hit: shareholders, depositors, bondholders and taxpayers.

Now, for most of these banks the stock price has essentially fallen to zero. So they’re pretty much already wiped out. Not much to be accomplished there, although those folks want to hold on to their equity in the hopes that they may recover on the upside. Then you have the depositors. But in FDIC insured accounts, they’ve got a federal guarantee up to $250,000. And presumably those with really big sums on deposit have been proactive enough to spread their money around several institutions. So not much luck there either.

Which leaves you with bondholders (the companies creditors rather owners) and taxpayers. Now, on the one hand, this sounds like a no-brainer. If you lend money to a company that goes bankrupt, that’s tough luck. Maybe you recover a percentage on the dollar of what you were owed. But too bad. Why taxpayers should cover those loses is really hard to answer. But let’s try it.

The counter-argument is that if bondholders, especially the most ‘senior creditors’, take a big hit it, will create a big shock to the financial system worldwide, making bond-investing money extremely risk-averse for a long time and making the credit markets seize up again on far worse a scale than happened last fall in the wake of the Lehman bankruptcy.

A second issue is that a lot of these bondholders are other financial institutions, so you create a cascade of failure.

(ed.note: as I spoke to economists who are extremely knowledgeable and I think not at all inclined to be carrying the water of the bondholders, what became clear to me is that it’s not just a question of our having no good theory of how to unwind a crisis like this, ‘we’ also don’t have a good handle on the facts of the situation, which makes everything much more perilous. Sort of like defusing the time bomb without having put the bomber on the rack long enough to have him tell you how it works. As one of them told me a few moments ago, the only people who really know where the bodies are buried are the folks who buried them. So as we’re trying to come up with some global fix, the people who screwed everything up won’t tell us where they put everything or what’s connected to what.)

I come into this extremely suspicious of arguments for why taxpayers need to cover the bondholders’ losses. Yes, those bonds are held by pension funds and insurance companies. In broad terms they’re held by very, very wealthy people. But I’ve talked to different economists who I think are pretty on the level on this and they think the systemic risk is very real. And not just huge shocks to the credit markets. The losers aren’t just guys in Monopoly suits who hold these bonds. It’s your insurance company, your state pension fund, etc. So there’s potentially a lot of collateral damage.

So where does this leave us? What’s the risk of having the bondholders take a big part of the hit? A lot of it depends on whether the issue with Lehman was just letting it go under or letting it go under in a totally uncontrolled way. It seems to me that what you need is a controlled and orderly process for unwinding all of this and some equitable and reasonable system for determining who takes what hits. Then again, since I don’t really know much about this how it seems to me doesn’t really count for much.

Whatever else, when we talk about AIG or what to do with Citibank or Bank of America, this is the essential issue — does the government protect the bondholders? And if we don’t, is the damage so great that we’re better off just covering these folks’ losses? Meaning, as one of these economists I just spoke to said, at this point, in this bad a situation, stability is more important than fairness.

Saying you’ll take the banks into receivership doesn’t answer the question. It’s a just a way of approaching it. The economists I spoke to for this both believe in nationalizing the big insolvent banks. They just also think we’ll likely have to do it with blanket guarantees for their obligations — even though it’s a big giveaway to the people now holding the banks’ debt.

Tim Geithner is addressing the House Democratic caucus tonight about bank bailouts and sundry other financial catastrophes.

Will be very interested to hear from our House Dem Member of Congress TPM Readers about what gets said and what gets asked.

You know where to find us.

Who’s got the mystery hold on Obama’s science advisors? Help us find out. Sens. Vitter and Martinez say it ain’t them.

I’ve speculated as to whether God created Michael Steele’s tenure at the RNC simply for the purposes of cosmic comic relief, seeing as the financial crisis appears so bleak. You can see in our feature we’ve got this story about a bizarrely thrown together request for proposals Steele’s team sent out looking for bids for rebuilding the RNC website.

He caught a lot of grief because the RFP seemed so laughably

put together. But he’s also drawn suspicion from a few GOP insiders who think it was thrown together so haphazardly because Steele has already decided on some friend’s firm to give the contract to.

Now, normally, fun as it is chronicling the Steele/RNC trainwreck, we wouldn’t waste too much ink on how they recruit their web designers. But this little wrinkle caught our attention today because, not to put too fine a point on it, Steele’s got a bit of a history for running organizations that pay nice chunks of change to contractors even when it’s not completely clear what work they did or whether they had the expertise or even the legal right to do it.

If I were a stakeholder in the GOP, I might be just as concerned with what’s going on at headquarters as I was with what Steele was doing on TV.

Meanwhile, Sean Quinn says that Steele’s fate could be sealed if the GOP gets a bad result in the special election to replace Kristen Gillibrand in New York-20 later this month.

Felix Salmon finds this little nugget in a NY Mag profile of Vikram Pandit, Citigroup CEO. It turns out that Sandy Weill, the guy who in the 1990s built Citi into the mammoth systemic risk Death Star it is today wanted the job to go to Tim Geithner.