An interview in Bloomberg shows why the bailouts won't work:

As details of Treasury Secretary Henry Paulson's plan to revive the U.S. financial system by pumping as much as $700 billion into the markets emerged Sept. 19, bond investor Michael Cheah was reminded of Japan.

When that country's real estate bubble burst, leaving a trail of bad real estate loans, officials flooded the economy with cash only to see banks hoard the money instead of lending it out. The result has been a series of recessions and persistent deflation for more than a decade.

"Although the government tried to debase the yen by printing a lot of government bonds, the economy went into a standstill,'' said Cheah, an official at the Monetary Authority of Singapore from 1991 to 1999 who manages $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey. "The banks used the money to buy safety. I see a repeat happening here. The banks will use it to buy Treasuries.''

We already know that Wall Street firms have used fed cash to speculate or to buy failing competitors. As the economic crash gets worse, they may just park it in treasuries to try to save their own hides.

Either way, they probably won't use it to keep the system from freezing up and "liquid" or to extend credit to consumers or businesses.