What the crisis has to teach traders AND my view on the bailout

This crisis is teaching a very valuable lesson to traders; you can't rule anything out! For instance many people assumed that the "bailout bill" would be passed... and it wasn't. I was totally shocked and I think most of the market participents were also.

Why do such extreme movements mostly destroy capital
It would seem that in a "zero sum game" of day trading capital should be preserved- i.e. if someone bet on the bill not being passed out then they should have made boatloads of money, equal in amount to the money that other people who were depending on the bill being passed lost.
Sometimes it does work the way people think. Other times, when the movements are too extreme - first one way and then the other way, BOTH parties can end up bankrupt! Say the market starts at 100 - goes to 50 and then comes back to 150. The person who was "long" i.e. had bought the market should make 50 units (150-100) however if that person cannot meet the margin call at 50 he will get liquidated and will have nothing to trade when the market does rise. Thus trading becomes PATH DEPENDENT. There are almost no path independent securities! Path dependent means that the overall profits realized don't depend only on the final and initial values but also on the path taken.

My view on the bailout plan:
I like the bail out plan in its current form a bit better. One of the issues is how exactly do we propose to value the complex securities. The second one is moral hazard that the banks who rolled the dice will do it again...

I think destroying equity value and preserving the bond value will be a decent answer to the moral hazard. In other words if the banks who rolled the dice are told- ooops bad outcome it means you go bankrupt (slowly), or are acquired AND your CEO gets fired... other bank won't do this in the future. However, by insuring that money market accounts ( who buy the bonds) don't go under , the "Main street" will be safe as people's deposits won't be taken away from them and the credit crunch won't be as bad. Just imagine the consequences of no one accepting credit cards anymore...... or bank checks or whatever> we are back to barter and cash :)...
Valuing complex securities... perhaps we have an auction where banks can bid on it.. the market is always a better determinant of prices than individuals (even the Fed!)