Here's the fundamental reason that I believe this bank bailout will fail:

[girl gone mad]

Most experts believe that the underlying cause of recent disruptions in the financial markets is a liquidity crisis. Banks are refusing to lend money to each other because there is too much bad debt floating around, and there is a basic lack of faith in the banks ability to make good on the overnight loans.

I was re-reading Margin of Safety, by Seth Klarman, this morning. Klarman is considered by many to be the next Warren Buffet. He manages a private fund that has earned 20% annual returns for the past 25 years, and he's an expert in buying up assets of distressed businesses.

http://en.wikipedia.org/wiki/Seth_Klarman

Here's what Klarman writes about investing in financially distressed securities:

"Since the effect of financial results on business results can vary from company to company, investors must exercise considerable caution in analyzing distressed securities. The operations of capital-intensive businesses are, over the long run, relatively immune from long term distress, while those that depend on the public trust, like financial institutions... may be damaged irreversibly. After a successful exchange offer, an injection of fresh capital, or a bankruptcy reorganization, these businesses recover to their historic level of profitability. Others, however, remain shadows of their former selves.

And there lies the rub. The banks we are bailing out have tarnished their own reputations by pushing subprime loans onto the unsuspecting masses, then turning around and selling off these risky mortgages as AAA rated debt. They engaged in a pattern of bad behavior in search of short-term profits. As a result, they have lost trust.

As Klarman writes, once the public trust is gone, the damage may be irreversible. A bank's biggest single asset is usually its reputation, and these banks abused their reputations, some of which had taken over a century to build. No government bailout can restore investor confidence in a system that is so deeply flawed. I believe that regardless of any action on the part of the government, these banks will remain shadows of their former selves.