Typically when Congress can't get the political backing to actually pass a bill to pay for something, they do the next best thing: get the political backing to guarantee something, or insure any losses. At the very least this reduces the cost of capital for the activity. Throw some tax benefits in and you go a long way to encouraging the behavior you are trying to stimulate. So potent can the effect be that you don't even necessarily need a direct guarantee. (The "too big to fail" condition and the "implicit guarantee" of a Fannie Mae is a good example here).
Alea points us to a Financial Times piece this morning that hints at the use of that kind of backing. To wit:
Forcing institutions to raise capital, be it private or public, at panic-driven fire sale prices threatens enormous dilutions to already shell-shocked shareholders, further exacerbating uncertainty and fuelling the downward spiral. This is self-defeating.
The question then is whether it is feasible to run a (nearly) capital-less financial system until panic subsides. If it is, then a solution to the financial crisis is in sight since it would free up trillions of dollars of hard to raise funds, covering more than even the most extreme estimate of losses.
I believe it is feasible to run such a system for a while, because, essentially, distressed financial institutions need (regulatory) capital for two basic purposes: To act as a buffer for negative shocks, and to reduce their risk-shifting incentives by exposing them to their losses.
However these two functions can be replaced, respectively, by the provision of a comprehensive public insurance, and by strict (and intrusive) government supervision while this insurance is in place.
We call the plan "Back Up and Bully."
The problem with this level of insurance is that while it preserves public capital (and prevents dilution) you can write a lot of insurance before anyone starts to notice that you are on the hook for, well, a lot of insurance. (See e.g., Fannie and Freddie).
Caballero is thin on details, particularly the part about how the day-to-day operations of a "capital-less" bank work. We wonder after these details. In the present situation a good share of the capital being raised is likely to actually cover losses. An interesting side effect of mark-to-myth accounting is that you might not trigger capital and margin calls based on those marks right away, but they could well be coming in short order. We tend to think that the Treasury knew a bit more than it was telling about the state of bank balance sheets early in the crisis. A capital-less solution might not be as practical as it looks here. Still, it's fun to dream- and not every case is a lost cause for this solution.
A capital-less financial system [The Financial Times]