The credit system has broken down. Banks have cooled on lending (maybe because they are not sure if the Obama administration will force a cram down in the future that would result in their loans being worth much less than they thought?). But the system also relies on hedge funds to purchase loans that banks make and package as securities.

Hedge funds would stand ready to buy these loans from banks, releasing more money that could then be used to make additional loans. Hedge funds-often heavily leveraged-made billions over the years with these types of securities. They often rode a wave of lower interest rates that inflated the value of their holdings. It was relatively easy money (especially if you were sophisticated and large enough to borrow overseas in Japan where interest rates were miniscule).

But they now face an unfavorable risk-reward situation. They have stepped back in the wake of recent losses. The easy money is gone. The solution that the Obama proposes? Subsidize hedge funds with taxpayer dollars.

The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.