The debate de jour is whether the banks, primarily Citi, should be "nationalized," in the sense that the government should take over their operations.
But the question is distinctly secondary. Citi's market value is already at zero; its stock market cap of about $10B reflects a bet that the government will in the end pay some money.
The real question is, what to do about the bond holders. As of 3Q2008, John Hussman points out that Citi had $560B in debt, which provided a huge protection for its customers.
The Fed seems to be bobbing and weaving to avoid inflicting any losses on these creditors. But this is silly. People who want risk-free debt obligations buy government securities; purchasing any private instruments involves accepting some risk in exchange for a higher return. Now that risk of loss has come home, and the Feds have got to stop pretending that any private investor is going to put more equity into the bank so that it can promptly be gobbled by the claims of the bond holders. And the Feds themselves should stop doing so. Protecting customers, including depositors, makes sense. Protecting bond holders does not.