The biggest news of the year, and perhaps the decade, is Congress' passing and President Bush signing into law the $700 Billion Bail-Out Bill, our esteemed elected officials' best attempt to rescue the teetering U.S. financial system. A number of different acronyms for this legislation will surely surface over the next few weeks, but for now, I'm content calling it the "BOB." See, Bob is a pretty anonymous, neutral, Switzerland type of name (apologies to all the Robert's among our loyal readers). It doesn't really tell you a personality type (think Thor, Butch or maybe Lance), doesn't signify a specific cultural or ethnic background (think Hans, Sven or Igor), and doesn't provide much insight into physical characteristics (think Slim, Stretch or Tiger).

After spending much of the last two weeks reading every piece of paper I could get my hands on concerning BOB, including the text of BOB itself, I can say with genuine conviction that at this point in time, no one really knows how BOB is going to work. Now, isn't that one of the scariest things that you've ever heard? We've authorized the government to spend $700 BILLION of taxpayer money and they have no idea how the money is going to be deployed? Forgive me if I give up my party allegiance and vote Libertarian this year.

The details on who will administer BOB have not been provided, but we've heard that the Treasury Department will be in charge and that according to a recent Wall Street Journal article, the Department "plans to hire about two dozen full time employees to work on the program, including lawyers, accountants and those with financial-market expertise."

Two dozen full time employees to repair a hole the size of the Titanic in the biggest leaking dam in the history of the free market universe? But why get bogged down in silly details like employees. Instead, let's focus on the meat of this: Which assets will the Treasury buy, who will they buy them from, how will they buy them, and what will they pay? Oh, that's right, BOB is silent on those details.

And that's really where it gets interesting. Let's look at a few different hypothetical loan pools for clues as to where BOB goes from here.

Pool A is a $1 Billion pool of 2nd trust deed residential mortgages that were issued by International Insolvency Bank. The Bank was taken over by the FDIC on a rainy Friday afternoon last month after its CEO, Joe Corruption, and CFO, Sam Bookcooker were found in a back alley attempting to purchase fake Luxembourg passports. Since the vast majority of the homes are now worth less than the amount of the first trust deeds, it should be fairly easy to value the seconds, right? Those loans are likely worth a penny, perhaps two, maybe three on the dollar. Not a big capital requirement for BOB, the kids can still go to private school, and getting rid of these assets helps to liquidate the Bank. Plus, someone will probably step up and buy these things for about those prices, so the taxpayers shouldn't lose their investment.

Pool B is another $1 Billion pool, but this time it's first trust deed loans, issued by Regional Bank of the Midwest. Regional Bank is still solvent, although they were placed on the FDIC's Watch List (the most secret list behind that of the identity of our country's top CIA operatives) last month, and have been told to supplement their loan loss reserves and mark their remaining loans to market. Should BOB buy these? Surely not all of the loans will default. Would it help Regional Bank if BOB scooped them up and wrote the bank a big check? Probably would be good for the balance sheet and would certainly bolster reserves. But, what should BOB pay for these loans? Regional Bank would of course say par. Here at Pathfinder, we would probably view Regional Bank's world in the 40 to 60-cent range. What does BOB think? Hard to tell, haven't spoken to one of those 24 new hires yet. See how it starts to get interesting?

Pool C is a series of commercial loans made by Troubled Bank of the Sunbelt. This pool is a hybrid breed of loans, or as my partner, Mitch would call it, a dog's breakfast. A construction loan on a new, empty Class-A office building (what, no pre leasing requirement before the steel went up? Shocking...); a mezzanine loan on a downtown condo high-rise tower, a land loan on a 400-tract residential project in suburbia...you get the picture. Some are worth more than others, but they all suffer from some measure of impairment. Troubled Bank is starting to take their pills, so they know they have to get rid of these, but they would like to maximize the value of the portfolio, so they've recently hired Joe Smooth, a real estate broker with an expanding national practice in selling loan pools. They're going to sell these anyway, so does BOB step in? If so, do they outbid the rest of us for these assets?

Pool D is not a pool at all, just a single commercial loan in default. Call it a $30mm first trust deed on a broken condo project in Florida. The loan was issued by a strong national bank, Strong Bank of Rhode Island. Strong Bank isn't on the watch list and really only made one lending mistake, the silly decision by loan officer Steve Aggressive to venture in to the Florida multifamily market. Being good guys and prudent business people, the Board of Directors at Strong Bank wants this off their books and recognizes that Strong is going to take a hit on principal. They have two recent appraisals showing that the real estate is now worth $24mm. They've tried to sell the note privately, but the Pathfinder's of the world are only interested in paying $20mm, because silly capitalists like us want to actually profit from our financial endeavors. Well, the one bad loan on Strong Bank's balance sheet is not going to break the bank or cause a run on deposits. $6mm is going to make a major dent in profits, but Strong Bank will live another day. Does it make sense for BOB to step in and buy this one? If so, for the appraised value? Unless BOB turns around and starts to operate the real estate (remember those 24 folks in the "asset management department"), the market will likely dictate the price back in the $20mm range, representing a $4mm loss to the taxpayers.

So, there's a significant measure of uncertainty in the next 18 months with BOB. If this was a complete bailout, I think the Treasury Department would need trillions of dollars, not billions, to get the job done. So what flavor of loan has the highest degree of toxicity? Currently, I think that residential HELOC's and seconds would go head to head with speculative land loans. Most types are nearly worthless and difficult to sell. As a result, it probably makes the most sense for the government to belly up to the bar, order a few shots of each of those elixirs and hope that it doesn't get too punch drunk as a consequence. The rest of the stuff? I say let the free market dictate pricing. There are plenty of folks like Pathfinder who are willing and able cash buyers. The disconnect has been pricing. If, as part of plugging in BOB's missing pieces, the Feds can require banks to sell their defaulted loans at real market prices, I believe the pain of this mess will be over much faster than if we fool around for months and years with make-believe valuations.

Here's a safe bet for these uncertain times: A lot of banks won't survive the next year of upheaval despite BOB. The biggest questions are how many will perish and how will they be put out of their misery - in outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.

It's safe to say that the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. BOB and its $700 billion may very well save some institutions that would have otherwise died, but it's doubtful that it will be enough to avert a major shakeout.

Lorne Polger is a co-founder and Senior Managing Director of Pathfinder Partners, LLC.  Previously, Lorne was a partner with a leading San Diego law firm, where he headed the Real Estate, Land Use and Environmental Law group.

The "Misery Index" - the unemployment rate plus the rate of consumer price inflation - hit 11.7% in early September. We haven't seen this level of angst in 17 years.

Home foreclosures are also skyrocketing. A record 1.2 million homes were in foreclosure during the second quarter, according to the Mortgage Banker's Association. The MBA reports that 2.8% of all outstanding home loans are in some phase of the foreclosure process, double this time last year.

And, the list of bank failures is also growing. The two latest casualties - the aptly named Integrity Bank, a billion-dollar, Alabama-based bank, was seized by the FDIC and state regulators in late August and Silver State Bank, a $2 billion Nevada bank, was taken over by the FDIC in early September, the 11th bank takeover of the year. The FDIC estimates that plugging the holes in Silver State's balance sheet will cost $550 million.

• Total assets of banks on the problem list are $78 billion, compared with $26 billion in Q1
• Loan loss provisions of all FDIC-insured banks quadrupled over the last year, to $50 billion
• Second-quarter net charge-offs $26.4 billion, versus $19.6 billion in Q1.
• Second-quarter U.S. bank net operating income $5 billion versus year-earlier $36.8 billion.

These forecasts are courtesy of Albert Edwards, top strategist at Société Générale. "We see a deep global recession. We expect the S&P to bottom at 500 (a 70% slump from the October 11, 2007 peak of 1,575 and a fall of 60% from the current level). We expect U.S. 10-year yields to bottom below 2%, oil at $60/barrel and the dollar to rally back to $1.35. In other words, you ain't seen nothin' yet!"

Another indicator that we may be in or heading for a recession: bankruptcydata.com reports that 15 major retailers have filed for bankruptcy protection in the first eight months of this year compared to seven for all of 2007. Among the victims: Mrs. Field's, Barbeques Galore, Steve & Barry's and Boscov's, a $1.25 billion department store in the Mid-Atlantic states, all of which filed for Chapter 11 reorganization. There will be no reorganization for restaurant operators Bennigan's and Steak & Ale - they filed for Chapter 7 liquidation.

With a soft economy, slowing consumer spending and increasing store closings, mall owners face another problem that may persist for years - a decade of overbuilding.

Developers have built one billion square feet of retail space in the 54 largest U.S. markets since the start of 2000, 25% more than what they built during the same period of the 1990s, according to Property & Portfolio Research Inc. ("P&PR") of Boston. U.S. retail space now amounts to 38 square feet for every person in those 54 markets, a 31% increase from the 29 square feet in 1983, the firm says.

Consider a six-mile stretch of highway north of Dallas, where three developers are racing to finish four huge shopping centers with a combined three million square feet of space. Not only will they compete with each other, but there are three existing malls within a 10-mile radius. "There just aren't enough tenants to go around for three projects," concedes Gar Herring, president of shopping center developer MGHerring Group of Dallas, which is building the largest of the centers.

Similar scenes are playing out across the country. DeBartolo Development indefinitely postponed construction of 700,000 square feet of retail space in Mesa, Ariz., due to weak demand. Green Street Advisors, a real-estate research firm, says 13 strip shopping centers under development have been canceled this year and 90 others have been delayed by the seven shopping-center developers it monitors.

Of course, retail landlords struggle and store vacancies rise in every economic downturn. But this time, experts say, the overbuilding means that high occupancy rates at malls and strip centers may not return for years.

David Simon, Chairman and CEO of Simon Property Group Inc., the largest U.S. mall owner with 323 malls, sees "a decade of little new development" and a shakeout. "There were a lot of projects that shouldn't have been built" in recent years, he said.

Some big retailers are curtailing expansion and closing stores. For the first time since the 1990-91 recession, occupied retail space in major U.S. markets is expected to decline this year, falling by 1.2 million square feet, projects P&PR. Last year, occupied space grew nearly 61 million square feet, the firm says.

As individuals who were intimately involved in the resolution of this country's last financial crisis, we follow with great interest Treasury Secretary Henry Paulson's proposal to acquire distressed real-estate assets from financial institutions. The current situation threatens our economy more than the savings and loan and banking crisis of the 1980s and early 1990s. The Treasury secretary should be congratulated for moving quickly and decisively.

We would like to offer some thoughts based on our experiences in starting up and operating the government-owned Resolution Trust Corporation, as well as a similar type of operation undertaken by the Federal Deposit Insurance Corporation for dealing with failed banks.

The RTC was charged with resolving nearly 750 failing savings and loan institutions holding $400 billion in assets, and the FDIC had an additional $200 billion from failed banks. Most of these assets were loans to homeowners, builders and developers. Many of the assets, especially construction and development loans, had no established market or "fair value."

The major difference between then and now is that the RTC was, with only a couple of exceptions, dealing with S&Ls closed by their chartering agency. This meant the RTC took over the assets after the institution failed, not before. So the RTC did not have to first negotiate a "fair value purchase price" with a troubled seller. Our experience with past U.S. bank and S&L assistance efforts, as well as those of other countries, leads us to believe that deciding what price to pay - and which institution to "assist" by buying their assets - will not be easy.

Guidelines should be established regarding which institutions will be assisted, and how the government will minimize losses, should "fair value" prices prove too high. One option is to not pay all cash upfront. Another method of protecting the taxpayer against overpayment would be for the government to have the right to recover some part of losses suffered on the later sale of assets. Other countries with asset-acquisition programs found themselves conflicted between paying too much to help the bank and trying to avoid losses eventually realized.

Clear guidelines for the management process should be established as promptly as possible for the real-estate loans and/or mortgage-backed securities acquired by Treasury. Like those owned by the RTC, all will require some level of active management. Buying and managing home mortgages acquired by Treasury will be very challenging. Valuation will be heavily influenced by local real-estate markets and the actions available to the lenders. Restrictions on lender actions or sale prices should be avoided to help maximize recoveries and minimize taxpayers' losses. Restructuring loans often provides an attractive option that avoids foreclosure and keeps families in their homes. But it is important that the lender be allowed to pursue other options when determined to be in the best interest of the taxpayer.

The most difficult loans for the RTC to manage were loans to developers and builders. Our guess is such loans are a looming problem that has not yet been fully recognized. While it is not clear if the proposal currently addresses such loans, it should. Their treatment will impact the property values underlying loans acquired by Treasury.

The RTC started a number of sales initiatives. For the more difficult real-estate loans and properties, we started hiring contractors to manage and sell the assets. But aligning the interests of contractors with the RTC proved very difficult.

The RTC saw that the larger its inventory of distressed assets became, the more the overhang impeded the ability of the markets to determine value and function effectively. We concluded that the only way to stimulate markets as well as avoid conflicting mandates was to quickly move assets into private-sector ownership and expertise, by selling them in bulk in an open and competitive manner.

Here are the most important lessons we learned from our experiences in the late '80s and early '90s:

• Acquired assets require active management. Assets tend to lose value while in government hands, as the government seldom can duplicate a private owner's interest in enhancing value. The RTC employed over 10,000 people in the first year of operation.
• Holding large inventories of assets will lead to depressed prices. No one wants to buy when the market has a large overhang of assets just waiting to be dumped when prices improve.
• To get the market started, assets have to be sold at very low prices. Such sales will attract buyers, with a resulting increase in prices. At the same time, selling at low prices could trigger accusations that the agency is "depressing the market."
• Every government sale or purchase creates winners and losers. This results in intense political and economic pressures to influence the actions of the agency. The RTC's independent governance and operations protected against fraud and political influence.

The Treasury proposal will undoubtedly raise many conflicts similar to those seen by the RTC. In our experience, government ownership and management of assets rarely increases value. Moving assets openly, fairly and promptly to sound private-sector owners is the best way to minimize taxpayers' losses. If the RTC hadn't adopted this approach, it might still be around today.

Mr. Seidman is former FDIC and RTC chairman. Mr. Cooke is former deputy FDIC chairman and RTC executive director.

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