What the heck is going on with the bank bailout?

I'll give my best guess at this point. I think there is a lot more than meets the eye.

Exhibit A is the NYTimes article, "Geithner Said to Have Prevailed on the Bailout."

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Now here's a question. When, in the two years that Obama has been on the scene, has David Axelrod ever been involved in a high level leak to the NYTimes? Answer: not once. Does anybody really think that Axelrod or any other high ranking official is going behind Obama's back, and trying to undermine his preferred Geithner plan? I don't. So that would mean that Obama is purposely airing this internal dispute. He wants it to get out there that Geithner is on the banker's side while key advisors like Axelrod are for tougher measures.

One thing that is important to remember, and I read this today somewhere, is that Obama cannot try to fight the republicans and the banks at the same time. Despite the fact that the banks are bankrupt, they still wield an enormous amount of power. The purpose of that NYTimes story was to show the banks that under Geithner and Obama they will not be lynched by a socialist mob.

At the same time, however, Obama is making it clear that banks are not going to get off the hook for their failure. Exhibit B, is the actual content of Geithner's proposal. If you look past the NYTimes headlines, which sound pretty good for the banks, the actual proposal is not that great for them (which is maybe why the stock market tanked today), albeit very vague. As Paul Krugman says,

The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect....So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.

Meanwhile, Matt Yglesias finds that, buried in the fine print, Geithner's proposal does allow for nationalization after all.

I'm holding out hope that Obama is on the right track here. Convince the bankers and the rich that you are not their enemy through Geithner. Convince them that you won't do nationalization except as a last resort. But then, for those banks that are insolvent, you go ahead and nationalize them. And in the meantime, you raise a public outcry over the "potential" leniency towards banks by Geithner, thus making it easier for you to go back to the banks and say "what else can I do? the nation wants me to nationalize, so thats what i have to do." If Obama can pull it off that way, I'll give him a standing ovation.