I doubt if many people understand that the banking system already stands to be bailed out in a different way -- by the FDIC.

Paulson's bailout plan is a substitute for the FDIC bailout route.

Suppose there is no Paulsonian bailout. The banking system is insolvent now because it is carrying so many bad loans. The banks fail to meet regulatory requirements if this paper is valued at market value, which is 30 cents on the dollar or less, from what I read.

So, suppose no Paulson plan and the FDIC moves in. Its procedures include merging the insolvent bank into a sound bank. But there aren't many of those around. Then what it does is pay off depositors and assume the loans itself. To pay off mass amounts of depositors, it will have to tap Congress which will borrow. That's the same thing that's happening in the Paulson bailout. Then, the FDIC will auction the loans, and that too is the same thing as in the bailout plan.

Paulson's bailout bypasses the FDIC. That is its first main effect. What this does is to keep the existing bank organizations in place, same management, same building, etc. They will need capital, and the government will provide it by buying those bad loans. In the FDIC case, depositors choose new banks to place their deposits. And the FDIC finds new merger homes for some banks.

The Paulson plan bails out the existing stockholders of the failed banks, whereas in the FDIC case, they lose more and maybe all. The Paulson plan bails out those who have loaned money to banks and also the larger depositors that are not insured. It's a bigger bailout because of that.

The Paulson plan also is a political Christmas Tree and football.

A major part of either the Paulson plan or the FDIC bailout is already baked in the cake because we already have FDIC insurance by law and the taxpayer is on the hook for that.

With that under our belts, we now have to ask: Do Paulson and Bernanke know this? Let's assume they do know it. Then, why do they prefer the Paulson approach to the FDIC handling this? And why is Congress so eager to say "yes" as well? Congress could easily have waited until the next session and raised objections.

The Paulson bailout plan preserves bankers and banks now in place. It shows that Congress is doing something. If the FDIC doesn't have to write checks to a lot of people, then a lot of people will not be inconvenienced and have to find another bank. The Paulson bailout helps those who have supplied the larger banks with non-insurable deposits. That is one of the biggest differences between it and the FDIC route. Ask yourself who these capital-suppliers are, the subordinated debtholders and the stockholders, and you have the key to one part of the politics of the Paulson bailout. Those owners are foreign banks, insurance companies, pension plans, mutual funds, etc. These investors are being bailed out.

In the original Paulson Plan of last April, the FDIC and Office of Thrift Supervision (which is the insurer of savings and loans) would have disappeared. The Fed would have gained, and there would have been a new supervisory czar. Paulson's bailout now is somewhat consistent with his original plan in lowering the role of the FDIC.