It's a shame it won't work. :-(

As you say, a lot of the toxic assets are worthless. They're still on the bank's books as having some value and contributing to the bank's capital. As I understand it, if the banks have to put them into a scheme and that scheme values them at something approaching their "real" value, then banks risk being (finally) recognized as insolvent. At that point, they're out of business. And other banks that count on their investments in that bank as having some value are forced to recognize that that investment is damaged. And so on.

The lottery tickets idea has an appeal, but doesn't help the "every bank owns a piece of every other bank" problem.

That's why the Treasury is continuing to tinker with TARP and so forth. They want to keep the banks operating, somehow, without the system imploding. Maybe they're thinking that something like Japan's Lost Decade wasn't such a bad outcome after all. http://krugman.blogs...pan-reconsidered/

Cheers,
Scott.