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Yang is heading out, the stock is crazy cheap and the company is profitable. What gives, Carl?

You can say a lot of bad things about Yahoo!. The boys at Google stole the Internet out from under them. Chief Executive Jerry Yang choked when presented with a rich buyout offer from Microsoft. Its psychedelic corporate color scheme--yellow and purple--may cause seizures.

Don't dismiss the Sunnyvale, Calif.-based Web portal as worthless, though. Wall Street has self-destructed. The U.S. auto industry's business model makes no sense. Yahoo! (nasdaq: YHOO - news - people ), however, remains a cash-spewing machine.

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So when corporate raider and Yahoo! board member Carl Icahn doubled down on Yahoo! in a Thanksgiving-week frenzy, after watching his previous investment lose $1 billion since buying 69 million shares of Yahoo! for $25 a share early this year, the question shouldn't be "Is he crazy?" The right question is: Has Icahn lost his nerve?

That's because Yahoo is overdue for a trip to the corporate chop shop. And while All Things Digital's Kara Swisher debunked a report over the weekend in the Times of London that Microsoft (nasdaq: MSFT - news - people ) would buy Yahoo!'s search business in a complex $20 billion deal that would place former AOL chief Jon Miller and former President of Fox Interactive Media Ross Levinsohn in charge of Yahoo!, some sort of deal seems inevitable.

That's in large part thanks to Icahn, who manage to scrap his way onto Yahoo!'s board this year and is only growing more aggressive by the day. Icahn spent $67 million for 6.8 million shares of Yahoo! stock in late November, according to the U.S. Securities and Exchange Commission. The move follows last month's announcement that Yahoo! is searching for a successor to Yang and boosts Icahn's stake in Yahoo! to roughly 5.5% of the company.

Who do you think is a leading contender for the Yahoo! CEO job? Check out what the market says (right).

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Yang basically lost his post after losing his nerve. First he dithered when Microsoft Chief Executive Steve Ballmer offered $31 a share for Yahoo!, at a time when its shares were going for $19.18 each. Then, after a series of halfhearted negotiations, Yahoo! ditched Microsoft for an ad partnership with Google (nasdaq: GOOG - news - people ). That partnership fell apart as well last month after U.S. antitrust authorities raised legal questions about the deal.

Enter Icahn. Yahoo! is a complex welter of businesses that has long added up to less than the sum of its parts. Last year Sanford Bernstein estimated Yahoo! was worth $54.3 billion, or $38 a share, when you add up Yahoo!'s cash position, stakes in Yahoo! Japan and China's Alibaba, and Yahoo!'s search, subscription and display advertising businesses. While that value has surely fallen, with Yahoo!'s market capitalization now at just $16 billion, chopping up Yahoo! is now a more attractive option than ever.

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To top it all off, Yahoo! is still cranking out cash, reporting net income of $54 million on revenues of $1.79 billion for the quarter ending in September. While the figure is well below the $151 million in earnings it reported during the year-ago quarter, that is still pretty sweet compared with anything you'll see out of Detroit.

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Making money on Yahoo! stock, however, could take some work. The recession will surely hurt Yahoo!'s earnings. Wall Street's chaos will make it tough to find buyers for chunks of the company, even if Icahn installs a management team willing to chop Yahoo! into bits. Laying off 1,200 full-time employees this month represents a first step. That will lop off more than $100 million in annual expenses in a hurry.

But let's face it, Icahn has a talent for making money on some pretty terrible businesses. He's picked over scruffy companies ranging from airline TWA to American Can. Maybe that's the problem. At Yahoo!, Icahn is sitting on a collection of franchises with a real future. It must be an unfamiliar sensation.

The mass efforts to modify mortgages and stave off foreclosures sound great. JPMorgan Chase (JPM) is reaching out to 400,000 at-risk customers. Fannie Mae and Freddie Mac are freezing foreclosures until 2009. Some 500,000 distressed borrowers at Citigroup (C) could get relief over the next six months. But even if banks live up to their promises, the initiatives may not be the panacea the housing market needs.

Following the lead of state and federal agencies, many of the industry's biggest lenders have announced plans in recent weeks to work out troubled mortgages by cutting rates, deferring principal, or extending the lengths of loans—all designed to lower borrowers' monthly payments and keep people in their homes. But absent further steps, the private and public programs together will help only about 2 million homeowners, fewer than a quarter of the borrowers expected to face foreclosure through 2010. Those tallies could rise if unemployment, now around 6.5%, climbs above 8%.

Not all borrowers should be saved. After all, some foreclosures are important to rid the market of people who should never have gotten a loan in the first place. Also, real estate speculators, individuals who bought a second or third home, and dubious borrowers aren't likely to get relief.

A necessary purge aside, the outlook isn't pretty. If banks do manage to prevent all 2 million foreclosures, the number of homeowners who default each year will still be four times higher than earlier this decade. It's hard to stabilize home prices when defaults are hitting records. The programs "are just a drop in the bucket," says John H. Maher at banking consultancy LECG (XPRT).

Despite the grand gestures, banks face hurdles in reworking loans en masse. Lenders can easily revamp the mortgages they own outright on their books, but they don't always have the authority to change loans sold to investors in mortgage-backed securities.

The legal battles could start soon. BusinessWeek has learned that a prominent money management firm plans to file suit in early December against one of the nation's largest banks over the bank's loan-modification program. The firm alleges the bank won't absorb the losses from cutting mortgage payments, passing them off instead to investors.

It may also take a while for banks to kick their programs into high gear. Consider AIG Federal Savings Bank. As part of a 2007 agreement with its regulator, the Office of Thrift Supervision, over predatory lending practices, the unit of insurer AIG set aside $178 million to bail out borrowers. Some 18 months later, the thrift has refunded only $48.4 million in fees, according to regulatory filings. AIG Federal Savings has also cut the overall size of its program by $53 million, leaving just $76.6 million to modify loans. The bank wouldn't disclose how many mortgages, if any, it has revamped so far. "AIG Federal Savings Bank [and an affiliate] have provided relief for thousands of customers consistent with the terms of the [regulatory] agreement," says an AIG spokesman. OTS officials say the program is working.

MANY BACKSLIDERS

Meanwhile, there's no guarantee that troubled borrowers who get a new loan won't become repeat offenders. Most of the new plans lower a homeowner's monthly mortgage bill to 38% or 40% of their aftertax income. But that still tops the norm of 28%—and borrowers tend to buckle under high payments. Historically, roughly 50% of modified mortgages sour after a few payments, according to Lender Processing Services (LPS), a Florida loan-processing firm.

A JPMorgan spokesman notes that of the 400,000 borrowers flagged for loan modification under its new program, some 40,000 have already been bailed out by the bank at least once during the past two years. Says Mark Fleming, chief economist at First American CoreLogic (FAF), a mortgage industry consultant: "Loan-modification programs have a high recidivism rate." That suggests the hangover from the housing bust could last for quite a while.

With Brian Grow in Atlanta and Mara Der Hovanesian in New York