It’s two Paulson Plans and several less grandiose patches later and we’re still trying to contain the Global Financial Crisis of 2008. The historic decline in real estate values–the destruction of the “forever up” property value dream–is the widely acknowledged source of today’s problems, but right now the focus, properly, is on arresting the contagion before we start talking depression rather than mere recession.

Giving banks some balance sheet relief should cure at least a bit of the suspicion plaguing the interbank lending system and therefore loosen up credit for lending to businesses and consumers. This is a matter of trust, the sine qua non of a system based on mutually beneficial exchange.

That’s not to say granting plenary authority–the newest Paulson Plan specifically exempts the Treasury secretary from judicial or agency review–in a four-page document is the way to go. The Financial Times reported Thursday morning that Paulson didn’t want to talk about specifics of a plan before he knew he could get one through Congress. Failure could sap any remaining investor confidence. What would a poor Treasury secretary do, except to sing to a reputable media outlet?

The bet here is Paulson knew he couldn’t write a mortgage relief/oversight bill and get permission from the White House. He’s also been dealing with US Rep. Barney Frank (D-MA) for many months now and understood why the Chairman of the House Financial Services Committee would want to get something passed. He’s also been dealing with Sen. Chris Dodd (D-CT), and knew the Chairman of the Senate Banking Committee would also have some things to say.

Wall Street danced to the tune of 400 Dow points late Thursday and 400 more on Friday. It coughed up 300 on Monday when it dawned on the geniuses up there that there’s a little more involved here than “Schoolhouse Rock” suggests. But Paulson, Frank, Dodd, and the White House were all set up to make a deal.

The ranking Republican on the Senate Banking Committee, Alabama Sen. Richard Shelby, all but said he would oppose the package. “Ten Conservative Concerns with the Treasury Bailout” was the headline on a sheet handed out by the Republican Study Committee, which met in the House late Monday. The checklist went from explaining fears of altering the free market system to simply stating: “It won’t work.” The Paulson Plan is an election-year gift to struggling Republicans: It allows them an opportunity to separate from President Bush and his historically low approval ratings, and it gives them a “business as usual” wedge to work against Democrats-and-their-Wall-Street-masters.

Nobody knows whether the bailout bill gestating in Washington will stabilize US banks; left undetermined still, as of this writing, is whether federal legislators will try to build a floor under home prices. And there’s the question of the length and depth of a recession.

Who determines, and how successfully they do so, the prices the to-be-determined government vehicle pays for distressed mortgage-backed paper is another important question. Will 22 cents on the dollar, what Merrill Lynch (NYSE: MER) received for a book of such assets in July, be sufficient to stabilize weak financial institutions? That price would probably give the government–and the taxpayer–plenty of upside potential; not every single loan comprising these securities is in foreclosure.

But there must be an infrastructure–a system and people–to make such determinations; the Resolution Trust Corporation, created to clean up the savings and loan crisis of 1989-95, employed more than 10,000 people. There’s no time to create a new agency to handle the current work, which will be geometrically more complex, so we’re left with the irony that institutions bailed out by the government are likely to be cleanup contractors.

Fed Chairman Ben Bernanke, during today’s hearing before the Senate Banking Committee, addressed concerns about the potential success of the new Paulson Plan in relieving pressure on financial institutions. From MarketWatch:

Federal Reserve Board chairman Ben Bernanke said that criticism of the $700 billion plan proposed by Treasury Secretary Henry Paulson overlooked a key ingredient: it is designed to avoid forcing banks to sell or value their mortgage assets at a “fire-sale” price. In a harsher tone than he has ever used in testimony, Bernanke spelled out the benefits that would accrue when the government can buy these mortgage assets at close to “hold to maturity” prices instead of the fire-sale price. Banks would have a basis for valuing the assets and won’t have to use fire-sale prices and their capital won’t be unreasonably marked down, he said. Liquidity should begin to come back to the markets and uncertainty should dissipate. Credit markets should start to unfreeze, he said. If the assets are purchased near the true hold to maturity prices, taxpayer losses should be minimal, he said.

Providing some aid to imperiled homeowners at the same time as financial firms is shaping up as a standard Democratic demand. Homeowner relief could take many forms, including Democrats’ proposal to allow bankruptcy courts to revise mortgage terms for families. Whatever the form, at least a nod in that direction now looks hard to avoid.

Less problematic is the emerging bipartisan impulse to create some kind of oversight board to watch how the Treasury and the Fed handle the billions of dollars in bad debt the government would buy. The Treasury agreed to an independent board to monitor the bailout and report on its progress to Congress and the public. The board wouldn’t have authority to veto Treasury investment decisions, and the bailout’s launch wouldn’t be delayed while a board was being put in place.

Details are still being worked out, but both sides have also agreed to a measure that would allow but not require the Treasury to take an equity stake in a financial institution that sells assets to the government. Whether it did so might be dependent on the size of the capital injection the government makes when it buys the assets.

The cliff we’re approaching is the prospect of a massive market downturn if Washington fails to act. The big stock market run-up that greeted first news of the bailout plan is Paulson’s friend, a reminder that a large fall awaits if the deal fails. No politician–not Shelby, Newt Gingrich, Frank or Dodd–wants to be tarred with the responsibility for a climactic, depression-signaling panic on Wall Street.

The Liberal Party has made its stance on repealing the income trust tax an official part of its platform:

The Liberals also promised to scrap the Harper government’s hefty tax on income trusts, a pledge that offers a potential new lease on life for an investment vehicle much beloved by older voters.

The Tory levy – applied at 34 per cent and declining to about 28 per cent over time – was not meant to collect revenue but to kill income trusts by discouraging their formation.

The Liberals, however, propose replacing this with a 10 per cent levy on trusts that is refundable for Canadian residents but not foreigners.

This could potentially revive the market for trusts and restore some of the market value this sector lost in 2006 when the Tories announced the surprise tax.

It’s the same proposal that former Liberal finance minister Ralph Goodale and other party MPs first floated in 2007.

The bad news is prospects for electoral success aren’t bright: “Liberals may have ‘hit the floor,’ poll suggests.”

As is often the case, our it’s-better-to-laugh-than-cry segment comes courtesy of Barry Ritholtz:

This is circulating around trading desks today . . .

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990s. THIS TRANSACTION IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY,

MINISTER OF TREASURY PAULSON

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat of the federal government.

Join me and my colleagues Neil George and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011362 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.

Canadian Oil Sands Trust (TSX: COS.UN, OTC: COSWF) announced an updated cost estimate for the Syncrude Emission Reduction project of approximately CAD1.6 billion (CAD590 million net to Canadian Oil Sands based on its 36.74 percent working interest). Canadian Oil Sands previously disclosed a cost estimate for the project of CAD772 million gross to Syncrude. The cost increase reflects a delay in the expected completion date and inflationary pressures. Construction of the project is approximately 14 percent complete with about CAD412 million expended to date.

The project is anticipated to reduce stack emissions of sulphur compounds by about 60 percent from current approved levels. Emissions of particulate matter also should be significantly reduced. The project involves retrofitting sulphur scrubbing technology into the operation of Syncrude’s original two cokers. The third coker that was constructed as part of the Stage 3 expansion already incorporated flue gas desulphurization technology that virtually eliminates sulphur dioxide emissions. Canadian Oil Sands Trust is a hold.

TransAlta Corp’s (TSX: TA, NYSE: TAC) 406-megawatt (MW) Unit 4 at the Sundance coal-fired power plant in Alberta was shut down Sept. 21, the Alberta Electric System Operator said in a report. There are six units at the 2,071 MW Sundance station, including two 280 MW units, 1 (which entered service in 1970) and 2 (1973), two 353 MW units, 3 (1976) and 5 (1978), Unit 4 (1977) and the 399 MW Unit 6 (1980). The plant consumes 9 million ton of coal each year from TransAlta’s Highvale Mine.

Power from the plant is governed by a power purchase agreement (PPA) from Jan. 1, 2001, until Dec. 31, 2017, for Units 1 and 2, and Dec. 31, 2020, for Units 3, 4, 5 and 6; 53 MW of power from Unit 4 and 44 MW of power from Unit 6 are sold through the PPA buyers to the Alberta Power Pool. All of the other units were also available for service. TransAlta is a buy up to USD40.

Consumers’ Waterheater Income Fund (TSX: CWI.UN, OTC: CSUWF) is acquiring the waterheater business of Thunder Bay Hydro Energy Services for CAD3.8 million in a deal that adds 5,960 waterheaters to the fund’s portfolio of about 1.4 million, mostly located in Ontario. Buy Consumers’ Waterheater Income Fund up to USD14.

Arctic Glacier Income Fund (TSX: AG.UN, OTC: AGUNF) announced an indefinite suspension of its monthly cash distributions to unitholders. The change is effective with the September 2008 distribution that would be payable Oct. 15, 2008. “The markets are clearly not recognizing the value of Arctic Glacier’s distributions to unitholders,” said Keith McMahon, President and CEO of the fund’s operating subsidiary. “In view of this significant change in unit value, we believe the fund would be more prudent to deploy its cash resources to reduce debt and strengthen the balance sheet.” The suspension of the distribution will conserve cash in the amount of approximately CAD3.6 million per month. Sell Arctic Glacier Income Fund.