a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance.
Government-insured and backed loans would have an instant market all over the
world, creating immediate and needed liquidity.
That's essentially the role of credit default swaps, but no one knows whether the insurers will be able to weather the storm. If you're putting the government in the business of guaranteeing CDS's, that's an imposition of liability without a backing asset or potential upside. In other words, it's a massive giveaway.
1. Rewrite any mortgage that is more than three months delinquent to a
6% fixed-rate mortgage.
My Dad and I were talking about this last night - forcing refinances to stabilize the housing market. There are technical and moral problems here
1) Amortization of a mortgage can be 20, 25, 30 years- but mortgages themselves are issued for no longer than 5 years. For obvious reasons, no bank is going to cut a mortgage for more than the value of the house at renewal time. Also, I don't expect the real estate market to recover quickly, for historical reasons (rental to property value ratio)
2) Foreclosures and penalties are priced into the rates you, as a good borrower, pay. Credit card companies lose money on customers that don't carry a balance; they make all their profits and more on customers that do. Therefore, this would jack up everyone's interest rates in order to keep the banks and bondholders solvent.
3) Finally, the government can't be seen as saving bad actors and rescuing people from their own decisions. That's electoral poison - it makes Willie Horton look mild by comparison.
That said, I recall seeing a potential solution that has people surrendering their severely underwater homes in return for a long-term lease, under the same terms (same payment size) and the right of first refusal on sale. This has the advantage of maintaining cash flow for the banks and reducing immediate dislocation, although it doesn't address the unbalanced rent to property value ratio issue.
a. Remove mark to market accounting rules for two years on only subprime Tier III
bonds/mortgages. This keeps companies from being forced to artificially mark down
bonds/mortgages below the value of the underlying mortgages and real estate.
I'm rewriting my answer to this b/c it doesn't really fit.
When the mortgages were packaged up and sold as bonds (securitization), the issuers split them in terms of risk as well as into quantities. They did this using the principle of subordination (the first tranche gets paid off entirely, then the second, then the third, and so on) and also through the use of credit default swaps, to upgrade/insure subordinate tranches. So it's difficult to identify which are and aren't vulnerable, complicated by the CDS mess described above.
Making an entire class of securities illiquid (by banning mark to market) also has issues in that they still count as assets, but will have arbitrary value until such time that the rule comes back into effect. This will dissuade investors and lenders from re-entering the market, because they won't know the real value of their counterparties. The entire corporate paper market is presently at a standstill for this reason.
Remove the capital gains tax completely. Investors will flood the real estate and stock
market in search of tax-free profits, creating tremendous—and immediate—liquidity in
the markets. Again, this costs the taxpayer nothing.
Net capital gains tax revenue is projected to go about $120B. Not quite cost-free. Likewise, the underlying assumption is that this exceeds the risk premium demanded by investors, but I don't see any evidence that this is so. Japan experimented with this in the 90's, as well as with negative interest rates - and it still failed to push investment money into the market.
I do agree with the premise, though, that we need an infusion of new capital to allow banks and other FIs to write off their losses and move on without bankrupting themselves. I don't think that it's going to come from private domestic sources, not least because domestic sources are tapped-out. It's likely not going to come from overseas, or at least not any time soon; any foreign institution, public or private, with major USD holdings since Jan 06 got murdered when the USD depreciated. Where then is the money going to come from?
) are just as much to blame as the CEO's and politicians. People wanted/demanded low interest, zero percent down loans and bought homes on spec. Some of those homes had inflated values and when the price dropped, people just walked away. It's not everyone, but we all in some small part looked the other. 
