Last Friday, behind closed doors, Treasury Secretary Hank Paulsen and Federal Reserve Chairman, Ben Bernanke, gave Congressional leaders the Armageddon scenario for financial markets and the US economy and provided an emergency solution in the form of Government intervention. Because they are not fools, our Government leaders saw the light and in a televised speech they announced that they would set aside politics and join forces to enact legislation to secure the viability of the financial markets. That was last Friday.

This week, given the opportunity to grandstand, those same legislators allowed politics to trump crisis management. Congress spent the last three days wringing its hands over how the Government is providing a $700 billion bailout of rich Wall Street cats. This, while credit markets are frozen, healthy corporations cannot get access to capital without paying exorbitant interest rates, the stock market is floundering and vulture countries with billions of our dollars are grinning, hoping that our ineffectuality will be their gain.

Then quietly the most respected investor in the world, Warren Buffett, turned the tide. By stepping up to the plate and making a $5 billion investment in Goldman Sachs, he engaged the ultimate use of moral suasion and de facto kicked Congress into action. He not only made an extremely savvy investment that stands to serve his shareholders well for a long time, but even more importantly he put the entire burden of the solution right onto the lap of Congress by stating that were he not convinced that Congress would indeed pass the necessary legislation, he would not only not have done the deal with Goldman Sachs, but instead he would have been selling his stock holdings. Nothing like a big fat stick to scare politicians. Thank you, Warren Buffett.

What are other CNBC Guests Saying ...

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Patricia W. Chadwick is an asset manager and financial consultant with more than 25 years of investment experience. She is founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.

As we watch the TARP support unravel in an ugly way onCapitol Hill, the situation is closely resembling the corestructure of every successful television show from "House" to"Baywatch." Let's run through this 4 act comedy/drama.

Act One

The show always begins with the introduction of thecharacters and the presentation of the problem. I'd say thisoccurred back in July and August of 2007 when we had the BearStearns hedge funds collapse, the ratings agencies downgrade,and the credit crunch explode into the financial markets. Wegot to know quickly Hank Paulson, Ben Bernanke, Chris Coxe,Barney Frank, scores of hedge funds, and the top 5 investmentbanks.

Act Two

In this section, we have the characters act to address theproblem and almost succeed until an unforeseen developmentoccurs that takes the characters/problem in a completely newdirection. To me, this was the massive rate cuts by the FederalReserve at the beginning of 2008 and the collapse of BearStearns with the subsequent takeover by JP Morgan. This sets inmotion additional downgrades by the ratings agencies and acredit time bomb begins ticking under the financial table.

Act Three

Here's where things get out of control, the charactersdilemma gets decidedly worse/funnier/desperate and everyonealmost dies as the world appears to be close to an end.Fannie/Freddie meltdown&takeover, Lehman goes intobankruptcy, AIG gets a $85 billion loan, the Russian stockmarket closes, WaMuis on death watch, Primary Reserve Fundbreaks the buck, OIS-Libor spreads explode and banks won't lendto each other, and TARP is presented. The characters appear tohave an agreement and even the Presidential candidates cometogether in perfect harmony......only to have it collapse underthe weight of a last second disagreement by the party of thecurrent President who's plan is trying to save the financialworld. That's irony on steroids.

Act Four

This is where the characters find a way to work together andfind a solution to resolve the problem and save theworld/relationship/integrity. Last night, we had the FDICtakeover and turnover WaMu to JP Morgan. Good first steptowards the denouement. However, Alabama Republican SenatorRichard Shelby and US House of Representatives John Boehnercontinue to express utter dissatisfaction with the Paulson plansaying very simply, "It's a mistake." The Republican plan thathas been offered has already been looked at by Bernanke/Paulsonand dismissed. Barney Frank has stated that to look at thealternative plan will take at least a week of debate. And thefinancial markets react with equities and Yen carry soldhard.

• Congress Under Pressure To Approve BailoutPlan

As Sen. Shelby says, the markets are the best disciplinarianfor their actions. He says he's willing to allow the markets toopen on Monday without a deal or a plan in place. So just howfar will the Republicans allow this financial/political game ofchicken go?" Let's see how their constituents react to theirIRAs and portfolios sinking while they can't get a car/houseloan. I wonder how bad things have to get before they changetheir perception and tell their Republican Congressmen/women toget a deal done? Unfortunately, we going to have to find outbefore we can have a conclusion to our show.

At the beginning of the week, I doubted whether a bill wouldget done this week and that has been the case. I think we'llget something agreed in principle by next Friday.....but itdepends on how far stocks sink.

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The uptick rule made sense when it was instituted back in 1938 and 70 years later it still makes sense. Simply stated, the rule required that a short sale be executed only if the latest transaction in the stock was at a price higher than the previous trade, (i.e. had been an uptick). The various arguments made for its elimination do not hold water relative to the rationale for its existence — as a check and balance against "bear raids" on stocks. Its elimination was a mistake and the recent rampant and destructive bear raids on more than a handful of financial stocks is evidence of that mistake.

Seasoned and sophisticated investors have voiced opinions on both sides of the issue, but the astonishing swiftness with which Morgan Stanley’s stock fell last week – 40% in a matter of a couple of hours – begs the question of whether that could have happened if there had still been an uptick rule.

Shorting is a legitimate investment practice but unbridled it can be “the tail that wags the dog" and as such should be subject to rules that do not allow it to wantonly destroy capital.

In fact I would argue that in today’s investment environment — where leveraged hedge funds control far more of invested assets than ever before, where foreign capital can attempt to sabotage our markets by committing financial terrorism (YES — think Putin!! think Ahmadinejad!!!) and where the internet is used as an abettor in nefarious schemes designed to destroy stocks — the uptick rule is more useful than ever before.

It adds a small measure of transparency in an otherwise murky investment environment. An uptick indicates that at least for a moment in time the buyers outweigh the sellers and that is very useful information to other potential buyers and/or sellers. Without an uptick rule, there is nothing to keep rogue sellers from borrowing capital and then shorting without actually borrowing the stock (illegal but done) and then blogging rumors and outright lies to panic other long holders into selling their shares, thereby generating a bear raid reaping the benefits of their scheme.

The uptick rule did no harm during its useful life. Hedge funds grew and flourished under its regime. Let’s reinstate it and help to keep a check on those who would wantonly destroy companies for their own gain.

What other CNBC Contributors are Saying ...

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Patricia W. Chadwick is an asset manager and financial consultant with more than 25 years of investment experience. She is founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.

One of the most debunked ideas of 2008 was the idea that the global economy and its financial markets would de-couple from the U.S. and remain buoyant.

This theory crumbled when the global economy followed the U.S. economy and began weakening, hitting commodity prices hard and spurring large-scale unwinding of the massive amount of commodity-linked trades positioned worldwide. Investors were long commodities outright, the currencies of countries benefiting from higher commodity prices, as well as the stocks and bonds of these countries.

In addition, investors went long the financial assets of countries benefiting indirectly from the massive amount of cross-border flows that went to countries such as those in Eastern Europe, Asia, and Latin America. Those that bet on de-coupling lost. The theory has credence but only from a secular standpoint; cyclical pressures are too great at the moment.

• Former IMF Chief Calls for Global Market Regulator
• Euro Cuts Gains vs. Dollar After Brief US Stock Fall

Monday's dollar drop and commodity rally was another bet on de-coupling. It is an idea that makes sense from a secular standpoint but is a miserable idea from a cyclical standpoint. How, for example, will the global economy recover from its woes if commodity prices rally and the dollar's decline prevents a recovery in export growth in foreign nations? It can't.

What is happening is that investors are again betting not only on de-coupling but on the idea that the price tag of the government's mortgage plan will boost U.S. debt and debase the value of the dollar. This theory has credence but it is far too soon to assess the cost of the government's plan, which could well turn a profit and result in a more stable economic and financial situation than if the U.S. put no skin in the game.

Another factor of late is that investors are peering into the future--well into the future, to a time when the U.S. and global economy will emerge from the current crisis and boost demand for commodities and enable the secular bull-run for the global economy to return. When it does then it will make sense to rally commodities and revisit the de-coupling idea. It is far too soon on this front.

• Euro Stocks End Lower on US Bailout Anxiety
• Asian Markets Are Jittery as US Bailout Doubts Persist

More: Click for Latest Economic coverage ...

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Buffet is smarter than I am. He's probably smarter than a lot of other people as well. He certainly showed how smart he is when he jumped at the opportunity to get a 10% yield on a piece of paper from Goldman Sachs.

He also has warrants which are separate and obligate him to nothing but watching Goldman's fortunes for the next five years for free. I don't think his opportunistic investment says anything about the health (or non-health) of the financial system in total. I think his investment says lots about how smart he is. First, to make the deal, and, second, to have the cash to make the deal when most are scrambling for capital.

• Bernanke's Plea for Bailout Is Met With Skepticism
• Click here to watch Bernanke's testimony

It's an expensive vehicle for Goldman, but it makes sense financially, and, especially, psychologically. Their leverage ratio goes from about 23:1 to around 18;1. That's a good step towards the lower leverage they will be required to have as a commercial bank. Earnings will be diluted about 20%, but their Tier One capital ratio goes to over 13% from 11% or so. Dilution is to be avoided if possible, but this makes sense since they either have to sell off a lot of assets over the next few years to conform to the commercial bank standards, or sell equity to get there. Or a little bit of both.

• Warren Buffett Watch

In the old days of start up biotech investing, the rule was to raise capital when you could, not when you had to. This is a good del for Warren, and fair deal for Goldman. But it says nothing about the overall health of the financial structure. Unless you figure he wouldn't have done such a deal if he thought the game was going to end tomorrow.

I was struck by his high regard for Paulson which he voiced during "Squawk" this morning. I agree that either candidate should ask him to stay on for at least another year. I did love his comment that he wished he had $700 billion to buy the derivatives with. Maybe we should ask him to do it ! And I'm not kidding !

• CNBC INTERVIEW TRANSCRIPT & VIDEO: Warren Buffett Explains His $5B Goldman Investment

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Ideas:

- Libor up at new high
- Peaks in spreads lagged the ending of past crises
- Investors with steadier nerves than the consensus will win

Substantial strains continue to exist in the money market, as evidenced by Libor and Treasury bill rates . Today (Wednesday), 3-month Libor was set at 3.476 percent, up a whopping 26.5 basis points on the day -- and the widest spread to the fed funds target since 1987.

The yield spread had been around 80 basis points for months before this latest hiccup (a "normal" spread would be closer to 12.5-25.0 basis points). Three-month T-bills are trading at 0.42 percent, down 28 basis points on the day.

• Buy Commercial Bank Stocks: Bove
• 5 Lies About the Paulson Plan: Cramer

Some of the strain in the money market undoubtedly reflects the forthcoming quarter-end, which is boosting demand for the most liquid assets, from Treasury bills to cash.

There are also pressures from Japan, which faces its fiscal half-year end, an event that even in normal times results in a repatriation of capital into Japan. Uncertainties over the U.S. plan to purchase distressed assets are of course contributing to the money market problem, not only on an institutional level, but on a retail level, as the proliferation of news on the plan is affecting the mood on Main Street.

• Busch's Blog: Fix The Money Market Freeze

I mentioned yesterday a pattern that deserves repeating: Libor, the TED spread, and other fear gauges have historically taken time -- at least 2-3 months -- before settling down following previous financial shocks. Such was the case following the demise of Long-Term Capital Management and Russia's default in 1998, and after the 1987 stock market crash.

It is only human nature for frayed nerves to take time to settle down. The key to whether it does is foreign involvement in U.S. markets, which is vital toward financing both the government's initial outlay (the $700 billion price tag massively overstates the actual price tag because the government is buying distressed assets at equally distressed prices; the U.S. could turn a profit), and its annual deficits.

No new ground has been broken in the dollar and I do not expect that it will for many reasons -- although confidence is an unpredictable variable, as many financial companies have found out this year.

More: Click for Latest Economic coverage ...

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As we await the latest performance by the dynamic duo of BenBernanke and Hank Paulson, I would hope they are spending sometime investigating something of their own: Namely, why themoney markets have frozen in the United States.

I would recommend they start with what is happening in thefallout from the Primary Reserve fund breaking of the buck forits money market fund.

This was due to the fund holding Lehman securities -- whichtriggered a mass exodus of shareholders from the fund.According to Reuters, the fund said it had about $23 billion inassets last Tuesday, down from about $65 billion as of Aug. 31.It's now down to $1.637 billion. The fund halted redemption ofshares last week. This has triggered redemptions from theentire fund complex, not just the money market.

• Cramer: 5 LiesAbout the Paulson Plan
• Buy Commercial Bank Stocks: Dick Bove

This is where the story gets interesting. On Monday, the SECissued an order that provides for "an orderly plan ofliquidation of fund assets to meet outstanding redemptionrequests and for making appropriate payment to the fund'sshareholders."

Dow Jones reported that the regulator also granted thepostponement of payment for shares which have been submittedfor redemption, also requested by the Reserve, saying it isnecessary for the protection of shareholders: "The Reserve hadasked the regulator to postpone the date of payment ofredemption proceeds for a period longer than seven days afterthe tender of shares for redemption."

Seems reasonable, doesn't it?

Unfortunately, it has massive implications for the rest ofthe money market and mutual fund business.

Shareholders are concerned about this occurring elsewhere,even with the new $50 billion money market plan. This meansmoney market managers don't want to invest in anything thatisn't the safest, most liquid asset, which they know they canretrieve in the shortest period of time. It's return OFcapital, not ON capital. This is why 3 month Treasury billsyield 0.7 percent and why the 3-month OIS (Overnight IndexSwap)-U.S. Libor spread has exploded to the upside. All billsbelow 3 months are yielding 0.3 percent to 0 percent, withsecurity fails being a constant threat.

The implications are not for an immediate buyout of $700billion in distressed mortgages, but for the SEC to make astatement that they are not going to freeze future redemptionsfrom mutual funds or money markets.

Then, it would be a good idea for Mr. Paulson and Mr.Bernanke to provide a larger, detailed program for assistingthe money market funds. Outside of finance, people don'tunderstand that the money markets are the engine of liquidityfor our financial industry and our economy. We need action onthis immediately.

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I just got off the phone with Ed Lazear (Chairman of the President's Council of Economic Advisors), and he made a good case for the severity of the crisis, esp. negative interest rate on t bills. It got bad last week. The sun turned to sackcloth, moon ran blood red, burning hailstone, etc....crazy stuff. Something had to be done.

The problem is that they are just beginning to understand what a few of us (including Larry Kudlow and Steve Forbes) have seen all along:

Over-regulation brought us to this crisis, not under-regulation. If we get the diagnosis wrong, then the prescription will be wrong too.

Think of the analogy of a 'bail out': someone knocks a hole in a boat and the water rushes in. The crew bails water out of the boat to keep it from sinking. If things are really bad, another boat comes and helps. This analogy points to the real problem: the hole! If you patch the hole early, no bailing is needed. If you patch it very late, the whole ship needs to go into dry dock. But the bailing out only makes sense in the context of patching the original problem. The worst thing to do would be to allow the ship to sink to make some kind of populist political point. No, revise that:

The worst thing to do would be to take the left's view and say "too much water in the boat, let's knock more holes into it so the water can get out."

That's what more regs would mean. Place salary ceilings on "every company that benefits in any way whatsoever from the bailout" as Barney Frank said today on CNBC, and you'll get a talent exodus. Give judges the power to obviate existing mortgage contracts with investors around the world - the dollar will plunge. Every one of those proposals is another hole in the boat.

The best thing to do is to patch the holes. Here they are:

Some are talking about putting a hold on the mark to market regulations. That's a start but not enough. Don't suspend mark to market, abolish it. It's part of the whole Sarbox, Spitzer, FAS 157 wave of punitive regulation after Enron. It makes no sense to impose and universalize temporary downturns, especially during panics.

Abolish the Bank Holding Company Act. It's a remnant of the 1920s before branch banking. Its only current effect is to keep private equity from buying majority stakes in troubled banks. Goldman's decision yesterday just illustrates the problem. They had to change structure in order to buy up other banks. This is nuts. Get rid of this dinosaur and private equity will start the capital infusions.

• Paulson, Bernanke Stress Risk to Markets, Economy
• Fate of Bailout May Rest With Republican Sen. Shelby
• The Senate Hearing--Bernanke's Persuasive Points (And More)

Abolish the Community Reinvestment Act. Forcing banks to make minority loans is the original sin out of which came the Subprime mortgage industry. Let banks decide where to loan; that's their job. Leave identity politics out of our credit system.

Do all of the above and I'm not at all sure that any bailout would still be needed. Before we subsidize these institutions, let's stop the things we are already doing to collapse them. Back to Hippocrates: First of all, do no harm.

What are other CNBC.com guest commentators saying?

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The yield spread between 3-month LIBOR and the fed funds rate is at its widest since 1987, reflecting continued funding strains in the inter-bank market and anxieties over the U.S. financial system in general. It is not surprising to see anxieties as high as they are given the magnitude of the current crisis, the history of reactions to previous crises, and plain old human behavior.

Concerns over whether Washington will pass the Treasury Department's proposal for purchasing up to $700 billion of distressed assets is the excuse given by most for the renewed strains in the financial markets, although it is difficult to fathom that investors truly believe Congress will fail to pass a bill this week. This means that the true driver of the continued strain in the money markets was last week's harrowing events and the impact it had on the psyche in the U.S. and around the world. Frayed nerves will eventually calm, as with past crises. (See more spread discussion in the video)

There is a long trail to the current financial crisis. Listening to our Government leaders blaming Wall Street greed for the entire debacle begs a response. The Government itself is an accessory before the fact to the state of affairs we find ourselves in today. Let’s review:

In the beginning – there were bad lending practices. And they are at the core of this extraordinary mess.

What was at the heart of the bad lending practices? The Federal Government!! Under both the Clinton and Bush administrations, it was government policy to encourage the private sector to ease underwriting standards in order to expand housing ownership in the U.S. The Federal Reserve under Alan Greenspan was an enabler in that development, by employing a monetary policy that kept interest rates exceedingly low, to the benefit of mortgage seekers. So lay blame on the US Government for bad policy.

The mortgage industry jumped on that bandwagon creating millions of new homeowners by advertising ‘no income verification’ mortgages and luring unsophisticated and sometimes barely literate would-be homeowners into debt obligations they did not understand. So lay blame on the mortgage industry for duplicity and greed.

Wall Street found a way to ‘create a silk purse out of a sow’s ear”. They employed their best and brightest - sophisticated software programmers and brilliant mathematicians - to package all that junky mortgage paper and create investment vehicles that suited many sophisticated investors’ risk appetites. They convinced the credit agencies that a million pieces of junk all bundled together really are riskless. So lay blame on the credit rating agencies for stupidity.

Wall Street then leveraged their shareholders’ balance sheets to the hilt to capitalize on the spread between low short term interest rates and the higher rates available from these new investment vehicles they created from all the junk mortgage paper. So lay blame on Wall Street for [w]recklessness.

And then SOME Wall Street firms paid their employees with illiquid stock and made it difficult if not impossible for them to diversify their assets. Their employees were enslaved – trapped by a system that penalized them for doing what they advised all their clients to do: make sure to diversify your assets and do not have all your eggs in one basket. So lay criminal blame on SOME (not all) Wall Street firms for destroying the livelihoods and the assets of their own employees.

AND THERE IS MORE THAT WE CANNOT FORGET:

Back in 2002, the US Government added a deadly long tailed fuse to the fire which has now exploded. By responding to abuses then in existence, it found an expedient solution that sowed the seeds of today’s crisis. That ‘solution’ was Sarbanes Oxley. By forcing companies to mark-to-market investments – something that was decried by many sound economists and academicians – the Federal Government ignored all the logical accounting rules that support pricing models that utilize different pricing rules for different types of assets. Be it naïveté, ignorance or the need to provide their constituencies with a politically aggrandizing ‘solution’ to the ‘evils of corporate America’, it was BAD POLICY and it is wreaking havoc today. So lay blame again on the Federal Government for creating bad policy and bad law.

One can already envision the new wave of regulation that the Government will emerge from this current crisis. Don’t for a moment think it won’t come. And because this financial crisis is bigger than those others we have experienced in our lifetimes – Long Term Capital in 1998, Savings & Loans in the late 1980s and early 1990s, portfolio insurance in the late 1980s, Penn Central in the mid- 1970s – the regulatory response will be far greater than Sarbanes Oxley. Well be warned – the seeds of a future crisis are just now being sown in the halls of Washington. The Government needs to learn from its own mistakes that cinching capitalism too tightly will only create a balloon-like response, causing another bubble which too will be burst.

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Patricia W. Chadwick is an asset manager and financial consultant with more than 25 years of investment experience. She is founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.