Some hard numbers to help put all of this in perspective:
According to the Fed's website (I did primary research instead of reading CNBC headlines): There is $17 trillion of total loan exposure. About $7 trillion reflects commercial real estate loans or loans secured by commercial real estate and $6 trillion are classified ambiguously. This leaves $4 trillion, of which $2 trillion represents single family residential mortgages and $2 trillion is credit card debt and consumer loans. So makes sense that TARP would use half of the $700B for issues related to mortgage defaults and half for credit and other consumer loans.
So assuming the commercial real estate pool will not be particularly hard hit by unscrupulous lending practices as Fannie and Freddie don't provide a backstop for these, we're talking about $4 trillion of exposure.
Delinquency rates in the past have been roughly 3.5%. If you assume delinquency rates equal likely default rates, the aggregate exposure on tranches is about $155 billion. Easily covered by the $350 billion in relief funds. If you assume default rates are wildly in excess of the worst they've ever been historically -- let's say 10% -- the TARP allotment still more than covers the exposure.
Even if I've misunderstood my numbers, presumably Washington employs spreadsheet jockeys intelligent enough to run sensible analytics. If I've not gotten this right, shame on Washington for not making this more transparent and making the people panic.
So why are financials getting so crushed? Granted a few firms will be limited from leveraging up as highly and conducting proprietary trading operations in the way they have in the past. However, the baby boomers' sell-out of their equity holdings means bank account deposits will rise significantly which means banks will begin loaning out money more liberally which means credit will become more available which means consumer spending will increase which means corporate earnings and profits will return which means the return of the bull...and the ultimate resurrection of UYG.