Obviously this causes problems for anyone who put the theoretical future value of this crap in the "assets" column to satisfy their capital reserve. But it never was money. When people found out Maddoff was running a Ponzi scheme, their investment went to $0. If you were counting your investment in his fund as "capital" then you lost it. Find the money somewhere else.

It's the find the money someplace else that the banks tried and failed at. Lehman went under because it couldn't. And when the consequences of that hit, the government decided they couldn't let any other big finance groups go under.

What we have right now with TARP works like this. Bank's go to the government and whine that their investments in Beanie Babies are not worth what they thought. The government asks "How much did you loose?" And the bank replies "You don't want to know." The government gives them a chunk of cash. The bank executives spent it buy thing themselves nice things. Repeat as needed.

Jay