There might be a gem in the Treasury's plan to buy $700 billion of dubious mortgage-related assets.

Call it the biggest carry trade in history. It might just put as much as $60 billion a year in the government's coffers.

All of the discussion of risk has focused on whether the government eventually could sell the assets it buys from financial institutions for more than they cost. In other words, whether the government -- and therefore taxpayers -- would incur a loss or a gain.

``I am very uneasy with the proposal to spend a trillion dollars to buy illiquid assets, toxic securities from large financial institutions, and have the taxpayers pay for that,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, said on Sept. 23.

The government will get the $700 billion by selling a range of Treasury securities to the public with yields of 3 percent to 4 percent. With investors around the world clamoring to buy risk-free Treasuries, the market should be able to absorb the jump in supply without a significant increase in yields.

Contrast that with likely yields on the troubled assets for which there currently is no market. No one can be sure how big a haircut there will be on the assets Treasury buys, though if it's 50 percent or more, their yields should be 10 percent or higher.

That is, the government will be borrowing at 3 percent to 4 percent to buy assets yielding 10 percent or even 12 percent. Conservatively, that spread on an investment of $700 billion should generate income of $40 billion to $60 billion annually.....

You have heard that its all "American Gambles"

You have been told repeatedly by George Bush and Henry Paulson that this bill is about a "rescue" of Main Street, not Wall Street.

You have been lied to repeatedly.

The bill The Senate intends to try to ramrod down your throat is neither about Main Street or really even about Wall Street.

You are going to get VERY angry. Sit down before you read further.

""Hundreds of billions of dollars are going to bail out FOREIGN INVESTORS. They know it, they demanded it, and the bill has been carefully written to make sure that can happen." - Brad Sherman , D-California"

That's right folks. You are going to have $700 billion - about 25% of the total federal budget - put on your personal credit card (via taxes forever) in order to bail out foreign investors.

Oh, and the best part of it is that the underlying assets involved do not even have to be in the United States!

Here is the definition of a "troubled asset", right from the bill:

"(9) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means— (A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability;

and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."

Notice that conspicuously missing from the definition is the requirement that the asset's underlying thing (that is, the property that was mortgaged, etc) lies within the United States. Also note that Treasury must tell Congress if they add "new types" of debt, but that Congress has no right of review or censure.

That is, it is perfectly legitimate under the bill for a foreign bank to sell or swap any "crap sandwich" it may hold (irrespective of how or where it originated, so long as a mortgage is the basis for it somewhere) with a bank domiciled in the United States, and said bank may then "PUT" it into the TARP.

Note also that Representative Sherman said on Kudlow last night that when this was raised with Secretary Paulson he was told that if Congress tried to restrict the ability of the Secretary to purchase assets "laundered" in this fashion from foreigners, that the bill would be vetoed.

Here 'ya go folks.

You better make this viral and spread it to everyone you know.

Right here, right now.

You better get on the phone to your Congressfolk at http://www.house.gov and http://www.senate.gov and make clear that you will not stand for this bill being passed.

IF THIS BILL PASSES YOU WILL WIND UP EATING $700 BILLION OR MORE - REMEMBER, THIS IS A REVOLVING CREDIT LINE, NOT A MAXIMUM AMOUNT - OF FOREIGN BAD DEBT FROM THE CHINESE AND ELSEWHERE.

THAT'S RIGHT - THE PURPOSE OF THIS BILL IS TO SCREW YOU, THE AMERICAN TAXPAYER, BY OFFLOADING ALL OF THE TROUBLED DEBT AROUND THE WORLD ONTO YOUR HEADS!

ARE YOU GOING TO LET CONGRESS GET AWAY WITH THIS?

YOU HAVE LESS THAN 48 HOURS TO STOP IT.

NOW YOU KNOW WHY IT WAS SUCH A "RUSH JOB" - THE AMERICAN PEOPLE WERE BEING CONNED OUTRIGHT BY BOTH PAULSON AND BUSH.

PERIOD.




http://market-ticker.denninger.net/a...e-Bailout.html

In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.....

Carmike Cinemas Inc., the third- largest U.S. theater chain by screens, suspended its dividend, while Duke Energy Corp., owner of utilities in five U.S. states, tapped $1 billion from a credit agreement and RC2 Corp., the maker of infant and preschool products, canceled an acquisition.

The paralysis in credit markets is changing how U.S. companies do business as banks pull back on loans or make them prohibitively expensive. Some companies are closing plants and stores, postponing takeovers and grabbing any available credit in a fight for survival.

``If businesses don't have access to capital, smaller companies in particular, they might get wiped out,'' said Alec Young, a New York-based equity strategist at Standard & Poor's. ``It's impossible to quantify how expensive this crisis is going to be for Corporate America; there's unlimited downside.''

Ford Motor Co., the second-largest U.S. automaker, said it repaid $1.5 billion in debt that was due today, without giving details. Analysts said yesterday they expected Ford to make the payment in cash and not tap an $11.5 billion revolving credit line. Slumping auto sales and surging borrowing costs may boost U.S. new-vehicle dealership closures as much as 40 percent this year, the National Automobile Dealers Association said yesterday.....

ANY good tradesman will tell you the importance of the bits of a house that you cannot see. Never mind the new kitchen: what about the rafters, the wiring and the pipes? So it is with financial markets. The stockmarkets are the most visible: as they soar or swoon, the headline-writers get to work. The money markets, however, are the plumbing of the system. Normally, they function efficiently and unseen, allowing investment institutions, companies and banks to lend and borrow trillions of dollars for up to a year at a time. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty stink.

At the moment, these markets are well and truly bunged up. In the words of Michael Hartnett, a strategist at Merrill Lynch, “the global interbank market is effectively closed.” The equivalent of a run on banks has been taking place, without the queues of depositors seen outside Northern Rock, a British mortgage bank, last year. This stealthy run has been led by institutional investors and by banks themselves.

Many banks have had to be rescued by rivals or the state. This week the Irish government felt compelled to guarantee the deposits and some other liabilities of the country’s six largest banks. Surviving banks have become ultra-cautious—“just taking things one day at a time,” says Matt King, a strategist at Citigroup.

The effect has been most dramatic in the overnight rate for borrowing dollars. Bank borrowing costs reached 6.88% on September 30th, more than three times the level of official American rates, while some were willing to pay a remarkable 11% to borrow dollars from the European Central Bank (ECB). Banks have become so risk-averse that they deposited a record €44 billion ($62 billion) with the ECB on September 30th even though they could have earned more than two extra percentage points by lending to other banks. It was the last day of the quarter and, for balance-sheet reasons, banks were particularly keen to have cash on hand. (Overnight rates fell back on October 1st, but one-month rates rose further, indicating that the crisis had not eased.)

In the absence of private-sector lenders to banks, central banks have become vital suppliers in the money markets.....

Rescue bill 101: What it says
Here's a rundown of key provisions of the final financial rescue bill.

NEW YORK (CNNMoney.com) -- After a tumultuous week of moral and fiscal debate over whether the government should take a very big role in the private markets, the House on Friday approved a sweeping and historic proposal to bail out the nation's financial system.

After defeating a similar plan on Monday - shocking markets and lawmakers on both sides of the aisle - the House voted on an amended version of the plan as passed by the Senate.

Here's a breakdown of some of the bill's main provisions:

Attacking credit crisis: The core of the bill the House will vote on is the same as what it rejected on Monday: the Treasury's proposal to let financial institutions sell to the government their troubled assets, mostly mortgage-related. It would only allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.

Protecting taxpayers: The bill is also similar to the original House bill in that it includes a number of provisions that supporters say would protect taxpayers. One would direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury would be allowed to take ownership stakes in participating companies.

The bill includes a stipulation that the Treasury set up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

Curbing executive pay: The bill would place curbs on executive pay for companies selling assets or buying insurance from Uncle Sam. For example, any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate.

Oversight: The bill would set up two oversight committees.

A Financial Stability Board would include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.

Tax breaks: The Senate-version of the bill that the House is considering on Friday includes three key tax elements designed to attract House Republican votes.

It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels.

The legislation would also continue a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns.

In addition, the bill includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "income tax for the wealthy."

New accounting rules: The bill underlines the Securities and Exchange Commission's power to change accounting rules on how banks and Wall Street firms value securities, and directs the agency to study the issue.

Some observers argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the so-called mark-to-market rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector. (More about the rules.)

Shielding bank deposits: The bill temporarily raises the FDIC insurance cap to $250,000 from $100,000. The bill allows the FDIC to borrow from the Treasury to cover any losses that might occur as a result of the higher insurance limit.

Federal bank regulators, who first floated the idea to Congress late Tuesday, said that bumping up the insurance limits would help improve liquidity at banks across the country. It may also provide a much-needed dose of confidence for consumers who may be worried about the health of their bank. (More about FDIC rules.)

The bill will also temporarily increase the level of federal insurance for credit union savings to $250,000.

Mitigating foreclosures: The bill calls on federal agencies to encourage loan servicers to modify mortgages by a number of means - including reducing the principal or interest rate. It also extends a temporary provision that exempts from federal income tax any debt forgiven by a bank to a borrower in a foreclosure.

Cost: The tax provisions of the bill - the bulk of which come from the addition of tax breaks from other legislation - may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the 1-year extension of AMT relief.

The Congressional Budget Office said it cannot estimate the net budget effects of the troubled asset program because of the many unknowns about that piece of the bill. However, the agency noted in a letter to lawmakers on Wednesday, it expects the program "would entail some net budget cost" but that it would be "substantially smaller than $700 billion."

Overall, the CBO said, "the bill as a whole would increase the budget deficit over the next decade."

As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.
“The US government has a technology, called a printing press,” said Fed chief Ben Bernanke in November 2002. (His helicopter speech).
In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards. As Bernanke put it, the Fed can “expand the menu of assets that it buys.”
There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.
Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance.....

U.S. Representative Elijah Cummings was shopping at a Safeway supermarket in Baltimore on Tuesday, Sept. 30, when an elderly woman stopped him. She was frightened, she said, because her daughter had called to tell her that her retirement account was in danger.

The day before, Cummings, a Maryland Democrat, had voted against a $700 billion financial rescue package that most of his constituents viewed as a bailout for reckless investment banks, he said. Its defeat in the U.S. House pushed the Dow Jones Industrial Average down 777 points, its biggest point drop in a single day.

Now, back at home, Cummings was confronted by symptoms of the widening financial crisis. Drew Greenblatt, president of Marlin Steel Wire Products LLC in Baltimore, told the congressman he couldn't fulfill a major order because his credit line was frozen. Students were calling Cummings' office worried that they couldn't get college loans.

``It hit me that the bleeding, the problems on Wall Street, had bled into Main Street,'' he said in an interview on Oct. 3, the day the House approved a revised rescue package. ``This is the biggest financial crisis of our lifetime.''

As the bill granted Treasury Secretary Henry Paulson the power to buy distressed securities from financial firms, tension remained over the merits of bailing out an industry that saddled itself with hundreds of billions of dollars in bad debts.

In Cummings' district, as in most of the country, there was sharp division between hostility for Wall Street and recognition of the need to revive stalled credit markets and stop the damage from spreading, lawmakers said in interviews.....

By Barry Grey

The announcement of a virtually open-ended government bailout of Wall Street has set off a frenzied competition among the biggest banks and financial firms to grab the lions share of the super profits to be reaped (RAPED) from the program.

Banks, brokerage houses, insurance firms, mortgage lenders, private equity companies and asset managers are furiously lobbying the Bush administration and Congress to make sure that the legislation authorizing the bailout gives them the biggest possible share in the spoils. Behind the public speech-making and posturing by administration officials, presidential candidates and congressmen, a sordid campaign of influence-peddling and vote-buying is under way, which will determine the details of the bailout law that is expected to be passed either this week or next.

Tens of billions of dollars in corporate profits and billions more in personal windfalls for senior executives and big investors are at stake. The plan drawn up by Treasury Secretary Henry Paulson not only allows the biggest financial firms to rid themselves of virtually worthless assets that are driving down their stock and slashing their profits, it provides vast opportunities for the winners in the money race to realize huge gains from the management of the program and the ultimate resale of the assets by the government.

The entire program is so rife with conflicts of interest that the term does not begin to capture the level of corruption and criminality it entails.

The New York Times on Monday carried an unusually frank article, which began, Even as policy makers worked on details of a $700 bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasurys proposal to buy up bad assets of financial institutions.

The article quoted Bert Ely, a financial services industry consultant in Alexandria, Virginia, as saying, Of course there will be fierce lobbying. The real question is, Who wouldnt want to be included in the package? The plan was so open-ended, Ely said, it could be interpreted to mean that the US government was open to buying any asset, anywhere in the world.

The Wall Street Journal on Monday quoted Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, which consists of chief executives of the nations most powerful banks, brokerages and insurers, who said of the industry lobbying campaign, This is the Super Bowl and New Years Eve of legislation.

Key issues in play include: Which institutions will be covered by the plan; what kinds of assets will the government buy; how much will it pay; how will the assets be valued that are palmed off to the government; which financial firms will get the franchise to manage the program and thereby cash in on fees and the eventual resale of the assets?

The Times article noted that within one day of the presentation on Saturday of the initial Treasury Department proposal, major changes had been made at the behest of big banks and Wall Street lobbying organizations. The changes dramatically widened the scope of the bailout.

Foreign-based financial firms that do business in the US, initially excluded, were given a place at the trough; the range of institutions qualifying for the program was broadened to include insurance companies, mortgage lenders and other non-banking firms; and the type of assets to be off-loaded to the government was widened from mortgage-related assets to include any other financial instrument.

As the Times article put it: There were signs of the industrys fingerprints on drafts of the legislation released over the weekend.... Securities firms were initially excluded but were included in a version released Sunday afternoon.

Among the changes being called for by various industry lobby groups are:

* Pushing back the date of purchase of assets which the government will accept. The Treasury proposal released Saturday set the cut-off date at September 17 of this year. Some bankers are demanding that the date be changed to December of 2007, and, according to the Financial Times, some industry groups are lobbying for a clause that would allow banks selling assets to the fund to account for any losses realized over a number of years.

* Small banks are urging the government to buy loans they made to homebuilders and commercial developers.

* Some bankers are pushing for government support for municipal securities.

* The banking industry, according to the Wall Street Journal, has gone directly to the SEC (Securities and Exchange Commission) demanding a letter changing US accounting rules that require banks to state the value of their assets at the market price. They instead want their rotten assets to be valued at their price at the time of purchasea change that would cost the government additional hundreds of billions in taxpayer money.

To put it bluntly, the American financial industry is preparing to deliver to the US Treasury every bad debt it accumulated over the years of reckless speculation and financial manipulation that generated super-profits and multimillion-dollar compensation packages for its top executives. And it is insuring that the American people pay super-inflated prices for their financial junk, so that they can launch a new and even bigger orgy of speculation.

The announcement of the bailout plan has set off a particularly ferocious competition for inclusion among the financial companies that are to be hired by the government to manage the operation. This plum job could, according to the Times, earn the winners $1 billion a year in fees.

Among the firms in the race is the asset management company BlackRock. Morgan Stanley, the Wall Street investment bank, is also running hard for the prize.

Another firm reportedly in the running is the private equity company Blackstone Group. It has expressed interest in buying up the assets when they are put back onto the market by the government. Blackstone made a fortune by betting against these very same assets early last year.

Bank of New York Mellon is also campaigning for a spot, as is JPMorgan Chase, the giant commercial bank that made a windfall in the rescue of Bear Stearns last March, in a takeover deal that was subsidized by the Federal Reserve Board to the tune of $29 billion.

All of these firms played major roles in creating the financial disaster from which they now seek to profit. They all are deeply involved in speculation on the assets that are to be bought by the government, and some, such as Morgan Stanley and JPMorgan Chase, have billions of such assets on their books.

Another figure who would like to be a Treasury Department asset manager is William Gross, chief investment officer at the bond management firm Pimco. The Times article noted, in passing, that Gross is among the financial executives Mr. Paulson... has regularly consulted with since the financial crisis began.

Gross made a cool $1.7 billion earlier this month in the government takeover of mortgage finance giants Fannie Mae and Freddie Mac, after having bet on the firms demise and publicly agitated for a government buyout of the companies. In recent weeks, he has been campaigning for precisely the type of government plan to buy the banks bad debt that is now being implemented.

WASHINGTON, (AP) --

The Bush administration is considering taking part ownership in certain U.S. banks as an option for dealing with a severe global credit crisis.

An administration official, who spoke on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

This official said all the new powers granted in the legislation were being considered as the administration seeks to deal with a serious credit crisis that has caused the biggest upheavals on Wall Street in seven decades and continues to roil global markets.

Supporters of this approach, such as Sen. Charles Schumer, D-N.Y., argue that injecting fresh capital into U.S. banks who want to participate in the program would be an effective way to bolster banks' balance sheets and get them to resume lending. Taxpayers would benefit because the government would receive an equity stake in the bank in return for providing the capital.

"This idea would, at a minimum, complement the administration's planned approach of buying up troubled assets and may prove to be the most promising tool of all in Secretary Paulson's kit," Schumer said in a statement.

A decision to inject capital directly into financial institutions in return for ownership stakes would be similar to a plan announced Wednesday by Britain.

Treasury Secretary Henry Paulson told reporters that Treasury was moving quickly to implement the $700 billion rescue effort and he specifically mentioned reviewing ways to bolster the capital of banks.

"We will use all the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," Paulson said at a Wednesday news conference.

Asked whether he would try something like the British plan, Paulson said: "We have a broad range of authorities and tools. ... We've emphasized the purchase of liquid assets, but we have a broad range of authorities. And I'm confident we have the authorities we need to work with going forward."

The administration so far has stressed its major goal is to purchase bad loans from financial institutions.

Paulson said that while the financial market turmoil has hurt the economy, the administration is moving quickly to begin the largest financial system rescue effort in history.

Even with the program to buy bad assets from financial institutions, he said, some banks will fail. He also called for patience, saying "the turmoil will not end quickly and significant challenges remain ahead."

In an attempt to help stop the financial crisis from causing a global economic recession, the Federal Reserve and other central banks cut interest rates in a rare coordinated move Wednesday.

Paulson called the coordinated rate cuts "a welcome sign that central banks around the world are prepared to take the necessary steps to support the global economy during this difficult time."

Paulson on Monday selected Neel Kashkari, 35, an assistant Treasury secretary, to be the interim head of the new program. In his remarks Wednesday, Paulson said the administration would move quickly to nominate someone to fill the job permanently.

Paulson said he was consulting with President Bush, congressional leaders and presidential candidates Barack Obama and John McCain before choosing someone to fill the job permanently. The post requires Senate confirmation, something Paulson predicted could occur in November.

The administration has been rushing to implement the program, which cleared Congress last Friday. Paulson said it would be several weeks before the program makes its first purchases of troubled assets.

"U.S. and global financial markets continue to be severely strained," Paulson said at the briefing called to preview the upcoming weekend meetings of finance officials of the Group of Seven major industrial countries, the 185-nation International Monetary Fund and the World Bank. The global credit crisis was expected to be the major agenda item at those talks.

The government said late Monday it had reached a deal to sell its remaining holdings of Citigroup common stock and would end up turning a profit of $12 billion on its bailout of the giant bank.

The Treasury Department said that a final offering of about 2.4 billion shares of Citigroup Inc. common stock had been priced at $4.35 per share.

Turns out the meddlesome bureaucrats whom bailed-out bankers and carmakers complained about so much were pretty good managers.

Intrusive U.S. officials this week sold the last of the government’s common shares in Citigroup Inc. -- and now show a profit of about $12 billion from the 2008 rescue of the nation’s third-largest bank in terms of assets. Last month, against the odds, these same irksome folks pulled off an almost perfect initial public offering of General Motors Co., recovering about $13.5 billion for taxpayers.

With Doris Burke
FORTUNE -- The bailout of the financial system is roughly as popular as Wall Street bonuses, the federal budget deficit, or LeBron James in a Cleveland sports bar. You hear over and over that the bailout was a disaster, it cost taxpayers a fortune, we didn't really need it, it didn't work, it was a failure. It has become politically toxic, which inhibits reasoned public discussion about it.

But you know what? The bailout, by the numbers, clearly did work. Not only did it forestall a worldwide financial meltdown, but a Fortune analysis shows that U.S. taxpayers are coming out ahead on it -- by at least $40 billion, and possibly by as much as $100 billion eventually. This is our count for the entire bailout, not just the 3% represented by the massively unpopular Troubled Asset Relief Program. Yes, that's right -- TARP is only about 3% of the bailout, even though it gets about 97% of the attention.....

By the Editors
Dec. 5 (Bloomberg) -- Regulators are making a valiant effort to ensure that big U.S. banks can survive the kind of shock the deepening European sovereign-debt crisis could deliver. If only the same were true for the broader U.S. financial system.

In a bid to restore crumbling confidence in the banking sector, and in compliance with the new Dodd-Frank financial legislation, the Federal Reserve is building an improved version of one of its most effective tools: stress tests designed to assess banks’ ability to withstand a market rout and a punishing recession.

Such tests played a crucial role in ending the market panic of 2009 -- an impressive feat given how lenient they actually proved to be. Back then, the tests’ worst-case scenario foresaw an average U.S. unemployment rate of 8.9 percent for 2009, falling short of the actual 9.3 percent. Nonetheless, the added clarity on the state of the financial system -- together with government capital injections -- helped bank stocks rebound more than 80 percent in the six months after the tests were announced in late February.

This time around, the Fed is subjecting the 31 largest U.S. banks to a much more daunting hypothetical future.....

Once American International Group repays the estimated $45 billion it still owes for the bailout it received during the financial crisis, CEO Bob Benmosche on Monday said the insurer will produce a profit of up to $10 billion for taxpayers.

“We want to show the taxpayer gets back all of their money, plus a profit,” Benmosche told “Mad Money” host Jim Cramer. “All over, the American people — between the Fed [cnbc explains] and U.S. Treasury — they’ll make between $5 and $10 billion profit when this is done.”

AIG [AIG 29.06 0.79 (+2.79%) ] received a total of $182 billion from the government during the crisis. It has paid down what it owed in a special purpose vehicle called AIA Aurora more than one year ahead of schedule. The repayment will free up AIG's collateral against AIA Aurora, which was set up in December 2009 in exchange for a reduction in the debt that AIG owed the New York Fed at the time.

The Treasury's current total investment in AIG is now $35.7 billion while the New York Federal Reserve's loan to the company is valued at $9 billion.

In March alone, the Treasury has recovered more than $14.6 billion on its investment in AIG, including the $6 billion from its sale of AIG stock, the department said. The U.S. government still holds a 70 percent stake in the company.

Benmosche would like to "end this chapter" and see the government sell out of AIG. But at the same time, he said the government being a shareholder is not the problem.

"They let us run the company," he explained. "This is not about the government telling us what to do and so we've got to be smart. We've got to do the right thing for the shareholders, the biggest shareholder being the government."

Watch the video to see Cramer's full interview with Bob Benmosche.

The U.S. Treasury further reduced its stake in American International Group and said on Tuesday that the United States would now profit $15.1 billion from bailing out the insurer.

The underwriters to the Treasury Department's $18 billion AIG [AIG 33.45 0.15 (+0.45%) ] stock sale are expected to buy another $2.7 billion worth of the company's shares, boosting the returns on the U.S. government's investment.

Combined, the sales reduce the Treasury's stake in AIG to 15.9 percent from 53.4 percent. The Treasury will be left with about 234.2 million shares in AIG when the offering closes.

The government once held a nearly 80-percent stake in the company and pledged as much as $182.3 billion to backstop the insurer when mortgage losses forced it to come up with a lot of cash quickly.

The Treasury has been winding down its bailout programs ahead of the November presidential elections where President Barack Obama has been defending his administration's decision to bail out certain companies.