Banks Are Running Out of Options

Freddie and Fannie are now down about 98% from year-ago levels, while AIG has lost 95% over the same time frame.

"Think about it this way," says Robert Ellis, a senior securities and investments analyst at Celent. "What they did in Britain is they took preferred. The shareholders, who have very little confidence in the stock anyhow, have got someone stepping in front with a 20, 30, 40 billion dollar stake. Those values are not going to hold up."

Still, policy advisers and economists say there aren't many alternatives. Banks need capital, and the only other way for the government to provide it would be to buy troubled assets at levels far above the market price. Such a strategy wouldn't dilute shareholders, but it would leave taxpayers holding the bag -- a tactic the public and many politicians wouldn't support.

Stifel Nicolaus analyst Christopher Mutascio says that buying assets at a fabricated price alone would neither restore confidence in the markets nor provide banks with the capital they need to start lending again.

"Does anyone really believe that if the U.S. Treasury buys these assets for 80 cents on the dollar that they are really worth 80 cents on the dollar?" asks Mutascio. "We don't think so. If not, will the banks really be able to recapitalize after selling a portion of such assets to the government?"

Furthermore, other countries have successfully taken a similar tack of nationalizing their banking sectors in times of crisis, then selling it back to the private market when conditions stabilize. Sweden did so in the last decade, as Chile did in the 1980s.

But comparisons are hard to draw, since the U.S. is the world's largest economy, and its problems and banking sector dwarf emerging economies, or even many established nations, such as Sweden. Ellis also notes that Swedish society is "much more egalitarian" than the U.S., which places greater importance on wealth and entitlements.