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What This Bailout Means to You

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When the first details of the government's proposed mega-bailout for Wall Street firms started leaking to the public late last week, the stock market rallied. Investors started thinking twice today, however. Let's take a closer look at the costs and consequences of the proposals that will likely be rammed down our throats.

Frankly, this bailout is simply yet another bad idea in a very long and costly string of bad ideas that have basically destroyed the very financial system its proponents claim they're trying to save. With a price tag currently estimated somewhere between $700 billion and $1 trillion, if not more, the direct costs of this monstrosity are far too large to be swept under the rug. In addition to the up-front charges, though, the long-run effects will likely be far worse.

Higher taxes
Let's grant for a moment the very generous assumption that this bailout will succeed where all prior ones have failed. The first thing you'll probably notice is a higher property tax bill as a result. The unspoken benefit of the housing price correction has been the revaluation of houses to more affordable levels -- and their tax assessment levels, too. If the bailout reinflates the bubble, up go property taxes, too.

As if that weren't bad enough, the ultimate price tag must be paid somewhere. While Uncle Sam is looking to borrow the cash, the debt service won't come free. Either it'll have to be paid back some day, or the interest will need to be paid in perpetuity. At current long-term Treasury bond rates, the interest alone works out to somewhere between $30.6 billion and $43.7 billion per year.

Faster inflation
Additionally, by printing a whole mess of borrowed money to pay for this monstrosity, the Fed will begin circulating a very large chunk of change. As that cash and credit finds its way into the economy, it'll start chasing the limited goods and services that are available. Too much money chasing too few goods is the classic definition of inflation, and with several hundred billion of new dollars floating around, it'll be guaranteed to rear its ugly head.

Even the mere rumor of the bailout was enough to send gold and oil soaring, and the dollar plunging -- classic signs of projected inflation. Within the past decade or so, too much cash chasing too few products has helped the Internet stock bubble, the housing bubble, and the commodities bubble form in the first place. Add an extra few hundred billion to the excess cash floating around, and the next inflationary bubble will be quite disastrous, indeed.

More and bigger risks later
Perhaps the most pernicious part of this bailout, however, is the way it punishes the innocent to reward the guilty for taking on excess risks they couldn't handle. The moral hazard involved is outrageous. Successful financial institutions like Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) , which didn't make all those bad loans, should've been able to start cleaning up by now. Instead, their reward for following prudent financial practices is to see new life breathed into their competition by governmental mandate.

On the flip side, failures like Washington Mutual (NYSE: WM  ) now get what may amount to a "get out of bankruptcy free" card. As the credit-and-housing bubble formed, Washington Mutual and its excessive risks outperformed the more conservatively managed Wells Fargo in the 2001-2005 housing cycle.

If Washington Mutual gets to survive by forcing Feds to buy its bad debt as part of the bailout package, the message comes through loud and clear: "You'd better risk everything in running your business. Your shareholders will get the rewards, and the government will take on the risks." Essentially, every bank will be encouraged by direct government subsidy to act as irresponsibly as Freddie Mac and Fannie Mae.

Can you invest through this mess?
Unfortunately, Congress appears to be hell-bent on passing something resembling this horrendous bailout plan to show how they're "doing something" in this critical election year. If the legislative train wreck can't be prevented, the least you can do is make sure your portfolio is prepared for the chaos that will ensue.

Companies like Wal-Mart (NYSE: WMT  ) and CVS Caremark (NYSE: CVS  ) that specialize in providing value-priced critical necessities will likely be able to weather the inflationary storm. Likewise, global titans like Coca-Cola (NYSE: KO  ) and General Electric (NYSE: GE  ) may be reasonable choices. Their strong international presence can buffer them from the plummeting dollar and worsening financial conditions in the US.

No matter how you try to invest, though, be forewarned. If this nightmare bailout passes, things will certainly still get far worse before they get better.

For an alternative Foolish take on the bailout situation, see Morgan Housel's story "Can We Afford All of These Bailouts?"

At the time of publication, Fool contributor Chuck Saletta owned shares of Washington Mutual and General Electric. US Bancorp is a Motley Fool Income Investor selection. Coca-Cola and Wal-Mart are Motley Fool Inside Value picks. The Fool has a disclosure policy.

Read/Post Comments (33) | Recommend This Article (84)

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  • Report this Comment On September 22, 2008, at 2:28 PM, madmilker wrote:

    got this jus off another does make cents!

    Email your Congress Person and Tell Them "NO MORE BAILOUTS"by David Neal09-21-08 On the 10th of June 2008, the Bank of International Settlements announced the largest gain in derivatives outstanding since they started to report on this. The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION. That is 1144 TRILLION DOLLARS.At the exchange rate this week (Wednesday), 35 trillion British Pounds was equivalent to U.S. $62 trillion. According to the International Swaps and Derivatives Association , $62 trillion is the notional value of credit default swaps (CDS) out there, somewhere, in the market. Credit default swaps are not standardized instruments. In fact, they technically aren't true securities in the classic sense of the word in that they're not transparent, aren't traded on any exchange, aren't subject to present securities laws, and aren't regulated. They are, however, at risk – all $62 trillion of them.These are TRILLIONS of Dollars not BILLIONSFrustrated by the US government's rescue of AIG, Fannie Mae and Freddie Mac, a group of 100 conservative congressmen today urged the Bush administration to stop keeping Wall Street afloat.The RSC members, all serving in the House of Representatives, noted with alarm that the government action this week "has the appearance of a socialist and not a free market approach to managing our economy".Rescuing failing financial firms has "set a dangerous and unmistakable precedent for the federal government both to be looked to and relied upon to save private sector companies from the consequences of their poor economic decisions," the RSC members wrote.All while this was going on the Major Media could only talk of the "New Messiah". Not one ounce of investigative journalism on the subject of who is liable for all this debt. Not one article, not a single word telling of the vast financial imbalances of leveraged monies, YOU our elected officials and the Big Banks have created. Just 9 days ago Henry Paulson (i.e.. former CEO of The Bank Too Big to Fail, CITI Group) told us "all is well". He has no idea what to do or what will come of this or he is a liar.The very same people that put us into this mess are the very same people advising the President and Congress on how to fix the problems they have created. This is insanity! The bailouts now being proposed are not bailing out American Workers but are bailing out the rest of the World on the backs of the AMERICAN TAXPAYER as if we don't have a huge enough burden already. The numbers posed by the Bank of International Settlements are staggering. Billion Dollar infusions will do nothing to stop the inevitable. A few weeks ago the billions and billions in infusions of American greenbacks probably helped delay, but did not repair the devastation. Today these same Billions of Dollars in bailouts are absorbed like a thirsty Whale. I can tell Congress one thing is for sure, that a movement has started and I and many many more like me are going to stop paying our taxes if this insanity of bailouts is not stopped, now! We are in historically unprecedented times. The foundation is being laid for a default of USTreasurys in the wake of the greatest regulatory failure in modern history (i.e.. the repeal of Glass-Steagall), and the collapse of the US financial system.

    If you look back, Paul Volker predicted this would happen if the newly appointed Alan Greenspan implemented his ideas to make more money for the banks. When this happens the World will turn their backs on us and things will get nasty real quick. All we will be left with is the American citizens, to pick up the pieces and start over. Congress needs to remember who butters it's bread and start standing up for American Citizens like you were put there to do. We are not worried about a "global financial meltdown", we are worried about being taxed to death and putting groceries on the table. We could care less about what happens to Wall Street. You also need to understand, we can and will - take back our country from the criminals in charge now.Here is a link to find your Congress Persons and email them your anger on these socialist bailouts that will do nothing to help the massive financial imbalances we face. They will only line the pockets of the architects of this mess and make our Tax burden unbearable.STOP THE INSANITY NOW!!!

    Posted by:

    Ben Franklin- 3:22 PM


    if tat be the case......

    we the people in deep sh......

  • Report this Comment On September 22, 2008, at 3:30 PM, michael5555555 wrote:

    First, $700 bn to $1000 bn is the amount of capital that will be deployed to purchase the extremely illiquid securities that are currently clogging up and undermining confidence in the financial system. These securities are collateralized by mortgages on American homes. These securities will be sold off as the market stabilizes and prices are no longer depressed. The total cost of the program will be considerably less than $700 bn, and it will become $700 bn if and only if nearly everybody that took out a mortgage in the past few years defaults. If everybody becomes a deadbeat than we have much more to worry about than the cost of this program.

    Second, let us consider the repercussions of not carrying out this program. As we witnessed last week, our financial markets will seize up. Large corporations will not be able to roll their debt, small businesses will not be able to obtain financing, and consumers will not be able to obtain mortgages, consumer credit, or student loans. The capital markets upon which the capitalist system will fail, and we will face an economic collapse not seen for generations.

    The program being considered is modeled on the Resolution Trust Corp, which was setup to work through the S&L crisis. It worked quite well and the federal government ended up earning a profit on it. Allowing scores of financial institutions to fail is modeled on the actions of the Hoover administration in 1932-33. Choose wisely.

  • Report this Comment On September 22, 2008, at 5:28 PM, Gak93 wrote:


    I beg to differ.

    1. I didn't see any of these lenders or banks that participated in this stupidity offering up their profits when things were going good. They should be forced to come to an accounting when things are going bad.

    2. Prudently managed banks and lenders will be able to buy the assets of the not so prudent for a song and then resale them. If we would only let the markets work. The seizing up that we had last week *needed* to happen because markets don't work and *shouldn't* work when there is no transparency, Credit Default Swaps being exhibit number 1.

    3.The RTC was *not* a success. 727 thrifts failed, and the RTC overshot its initial $50 billion budget by $50 billion. Or said another way, they overshot the funds needed by 100%


    4. And lastly but most importantly, it is wrong and horribly immoral to pass $11 trillion dollars worth of debt to our kids and their kids. We need to deal with this problem now by letting the market decide winners and losers. Not the government. And certainly not with my children's tax dollars.

  • Report this Comment On September 22, 2008, at 5:37 PM, tompiperdon wrote:

    GE as safe harbor? Guess so, since now it can't be shorted

  • Report this Comment On September 22, 2008, at 6:36 PM, YRDOG wrote:

    Ben Franklin is right, this mess began with unregulated derivatives. Alan Greenspan allowed "this new wonder financial instrument" to go unregulated. Derivates seem so complex that the people who created them seem not to know how they work... This is a chance to get them under some kind of control, if it not too late.. Simply tax all derivatives at .1% and track them through the treasury and publish the list. Let the treasury start taking in money from the people who seem to be doing the most damage to the system, Let anyone who wants to take a look at just what kind of back room side bets these "smarties" are doing. I have not heard one comment in the main stream press about how unregulated derivatives have turned the financial system into a casino that is about to go belly up. Unless derivatives get put under some kind of control, the same mess will appear shortly again, if there still is a system for it to appear in.

  • Report this Comment On September 23, 2008, at 12:24 AM, mwatch2008 wrote:

    If the Ratings agencies such as Moody's and S&P have done their work properly, we would not be in such a messy financial crisis. Investors should have been warned months, if not years, earlier that the many structured products and Securities backed by subprime mortgages are potentially very risky. Instead, they were happy to go with the flow because they got paid handsomely for their services and allows many financial institutions to market their toxic portfolios. Indeed, one agency was even found to intentionally cover up their Ratings errors.

    Now, when many financial institutions are struggling with subprime crisis and many established institutions like Bear Sterns, Fannie Mae, Freddie Mac and Lehman Brothers gone out of business, these agencies emerge to create more fears and chaos in the already panic-strictened market by downgrading many companies that we all know are in great finanical distress.

    If these agencies cannot accurately assess risks and protect investors from tremendous loss when the going is good, they should keep their mouth shut when the going is tough for many investors who see their shares decimated. Their downgrades could be the last straw that breaks the camel's back. These Ratings agencies make easy money by spreading fear and get credit for themselves by recycling information that are so obvious.

  • Report this Comment On September 23, 2008, at 3:15 AM, GoNuke wrote:

    There is no such thing as a free market. To keep the system fair and to maintain the competition that serves us we regulate markets. We are all participants in, beneficiaries of, and supporters of regulated free market economies. The US financial markets only function because we trust them. Without trust there would be no market.

    Inadequate regulation made murky and unethical practices possible and precipitated this crisis.

    Some people tried to take advantage of it by creating what were, in effect, bogus securities. Oddly enough many of the perpetrators of this crisis were also its biggest victims.

    The government must restore confidence in the system. It must restore transparency to the financial markets by regulating derivatives. It must regulate mortgage lending to the extent that the borrower must share some risk by putting up some portion of the capital -why didn't we learn from the Tokyo crisis? Where is the moral hazard in buying a home without risking any of one's own capital. Where is the moral hazard for a mortgage broker that can sell the loan on to another bank. The bailout does not remove moral hazard from the system.

    Participants in the system had already learned how to dodge moral hazard.

    I think that it is clear that a lot of people who were required to carry out due diligence did not fulfill their responsibilities. The banks that don't need bailing out will end up with greater reputations -superior brands if you will. The imprudent banks may dodge the bullet temporarily but as an investor I am going to remember this crisis for a while. I will invest in the management teams that didn't put their companies at risk. When these teams seek to takeover the imprudent banks I will be there to help.

    The market can't value the distressed assets, they are too complex. With any luck the Treasury will unravel some of the mystery so that the assets can be evaluated by the "free market". Then the assets can be sold. The government is limiting its total investment in assets of unknown value. They do have some value and the government will recover some capital.

    The bailout is a good investment from the government's perspective because it will serve to maintain the operation of the economic engine that generates the nations wealth -the US economy.

  • Report this Comment On September 23, 2008, at 11:58 AM, MKO1 wrote:


    I suggest you think things through a little more clearly, and have all of the facts before you type up an article such as "What This Bailout Means to You" ( You are way off, and simply jumped on the bandwagon of those that really do not understand how the system works. Shame on you for perpetuating a kindergarten-intelligence-level rumor / concern about the proposed bail-out. Please go back to school.

  • Report this Comment On September 23, 2008, at 12:14 PM, GMSInvesting wrote:

    I am not so sure how this is a get out of jail free card for WaMu. This article sites making profits for shareholders but those holding the shares when things turned are unhappy I am sure. It is true managers like to see short term profits to boost the stock price but no matter how highly compensated, you got to believe a lot of these CEO's, CFO's, and portfolio managers are regretting their decisions not sailing around the world on tax payer money.

    Oh, and its not like the companies ever paid taxes on their high profits I'm sure.

  • Report this Comment On September 23, 2008, at 12:43 PM, JrRelic wrote:

    My wife works with a Financial company and one of the clients at her office was given a mortage a few years ago by prudential, I belive. Anyway, she is at the same job making mostly the same $1,300.00 ever two weeks, and the person filling out the income verification sheet, which she didn't sign, put her income at $8,500.00 gross per month.

    Now why should my tax dollars go towards bailing out a company that commited fraud against the woman who might end up loosing her home? I wasn't her fault, from my understanding the payments she would accually be able to afford if she is able to get re-financed.


  • Report this Comment On September 23, 2008, at 1:22 PM, packetdrop wrote:

    MKO1, if you have any clue how the system works please tell us, simply bashing the article's author for having no idea is not an argument.

    I do understand it, and the author is correct. Higher inflation due to a socialist economic policy. Tell me how bank bailouts are anything but socialist in nature?

    So you please get a clue and learn how the FED and FDIC actually work.

    Here is a great place to start:

    Read that and tell me you think our policies are correct.

    For us to pay for a bank's failure, is insane.

    Private profit, communal debt. That's b.s.

    Let me guess, are you a banker? do you work for wamu?

  • Report this Comment On September 23, 2008, at 3:02 PM, brassoff wrote:

    I'm 22 and I think that what the government ends up doing will have a huge impact on my future. Here's how I explained the situation:

  • Report this Comment On September 23, 2008, at 4:05 PM, Will8332 wrote:

    Where the Hell is the IMF?

    Wilfred Candler

    September 22nd, 2008

    Paul Krugman’s column “Cash for Trash” in today’s New York Times, rightly says:

    “Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis ‘contained,’ and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.”

    Sorry to say this, but I think Prof. Krugman is right. This is just another of Bush administrations “Mission Accomplished” moment, with not the slightest idea of what needs fixing or how to do it. There is absolutely no more reason to think that the arbitrary figure of $0.7 Trillion “surge” will do the job, than the many multi-billion dollar interventions that can now be seen to have been no more than band-aids.

    While the bubble was inherited from the Clinton administration, the current “fine mess” is a pure-Bush product. Can we expect the authors of this mess, to be any better able to fix it, than Laurel and Hardy? Just listen to Paulson (and Barnake (??)), their “plan” changes hour to hour. Initially it would apply to Banks headquartered in the States, now it is worldwide; initially it was to cover distressed mortgages, now it is to cover “any financial instrument”; there is lobbying to include “municipal securities” in order to protect Money market funds; and Paulson has been careful to leave open the possibility to return to Congress for more funds, should his initial estimate of $0.7 Trillion prove insufficient. The bottom line is that nothing about the preparation or presentation of the present proposals is reassuring: The very firms that profited handsomely from creating the mess now argue that they have the “expertise” to profit almost as handsomely in cleaning up the mess.

    Where is the International Monetary Fund (IMF)? If this crisis originated in Argentina, Mexico, China or the Russian bond market, we can be sure the IMF would ride to the rescue with the offer of liquidity in exchange for more sensible economic policies (i.e. “Washington consensus”). The IMF was created exactly to protect the international monetary system, and it is this threat that is being used to justify the current $ 0.7 Trillion intervention. Isn’t the idea of the IMF that rather than borrow from its taxpayers, a government in trouble (surely that describes the Bush administration?) can borrow from the IMF? So far, there is no evidence that the IMF has even been asked for its views as to the adequacy of the proposed program. If the IMF has no views on the causes and cure for the present crisis, perhaps it has outlived its usefulness? If it has a view, it would be helpful if this were made known.

    Paul Krugman suggested that there are four components of the present crisis that need to be addressed:

    “1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

    2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

    3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

    4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the ‘paradox of deleveraging.’”

    Lets address these in turn:

    • Collapse of the housing bubble, associated arrears in mortgage payments and foreclosures. Foreclosures have two undesirable results (a) they depress housing prices and (b) force the owners to find alternative accommodation. In addition they result in the home owner losing any equity originally put into the property, or acquired through mortgage payments, and (b) they result in losses to the lender equivalent to the difference in owner equity, and current market price. (As individual lenders foreclose on a property to salvage any remaining equity, they force down market prices, thus actually depressing the equity of home-owners as a whole). The solution seems to be to require home owners in arrears to pay the lesser of, the monthly contracted mortgage payment or a rental equivalent to 5% of the market price of the property. Property owners who opted for the lesser rental of 5% of current value, would automatically become renters, thus losing any equity they had in the property. These 5% renters would also be required to pay taxes and upkeep of the house. Under this scheme the only people forced out of their houses would be people who committed to annual payments in excess of 5% of current market value. The resulting (few) foreclosures would undoubtedly involve individual tragedies, but some element of “market discipline” is necessary if we are to have any semblance of a market based economy. Losses would be divided between the new renters, who would lose the equity they had in the property, and lenders who would lose (for new renters) the difference between the over-valuation assigned to the mortgage, and the equity sacrificed by the borrower. Obviously this loss of capital by mortgage owners would be painful, but their remaining capital would be liquid, since the property could be sold albeit with a sitting tenant.

    • Financial losses have left (and will leave) many financial institutions with too little capital. Rather than buying hard to value mortgages, the Treasury (or IMF) could lend money at LIBOR + 1% (London Inter-Bank Borrowing Rate) for say for five years, with the option (by the borrower) to convert the loan to shares at the lesser of the share price at the time the loan was made, or current price. Companies borrowing under this scheme should be given a “claw-back” right to be repaid any remuneration (salary plus bonus) paid to employees in excess of the President’s salary, for the last seven years. This would allow firms to relieve their capital shortage, albeit at a substantial cost.

    • Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs. The previous bullet ensures that companies would be able to obtain additional capital (albeit in exchange for equity, and a reasonable interest rate). The danger of the Administration’s current proposal, is that the Treasury will over-pay for distressed assets, thus making capital available for lending at too low an interest rate.

    • Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the ‘paradox of deleveraging.’” Quite so, this is why the first bullet suggests replacing foreclosure by a rental arrangement. This should greatly relieve the downward pressure on house prices.


  • Report this Comment On September 24, 2008, at 6:52 PM, DBrown7 wrote:

    Chuck, if you still think this bailout is a bad idea, I suggest you read the transcript of the CNBC interview with Warren Buffett today. You might want to modify some of your thoughts.

  • Report this Comment On September 24, 2008, at 8:55 PM, TMFBigFrog wrote:



    I'm as big a fan of Warren Buffett's investing abilities as any other Fool, but I find his politics to be questionable. In this particular case, he's advocating a bailout immediately after making a multi-billion-dollar investment in a firm that will likely benefit tremendously from such a bailout. That makes his motiviations at least as suspect as Paulson's.


    Remember, too, that Buffett routinely argues in favor of higher income and dividend taxes. The dividend taxes are taxes he himself would laregly be immune from, thanks to the fact that his Berkshire Hathaway pays no dividends. The income taxes are a lot easier to minimize if you happen to live in a cheap part of the country like Omaha, Nebraska than if you live in a high-tax, high-cost area like New York or California and need a higher salary just to make ends meet.


    The day Buffett advocates for higher taxes on inter-company and corporate-received dividends (rather than individual received dividends), and the day he advocates for a confiscatory wealth tax on the living, is the day I'll start believing he may be authentic in his beliefs on taxation. Because then and only then will he be advocating for higher taxes on himself and the company he controls, rather than higher taxes on everyone else trying to make a living or to get ahead.


    Until then, the evidence points to this talk (after he made the Goldman Sachs investment) being yet another attempt by Buffett to tax everyone else to benefit himself.


    I know this won't win me fans among those who view Buffett as some sort of religious icon, but he does have quite a history of advocating higher taxes and higher costs that wouldn't really affect him while simultaneously taking advantage of the existing rules of the marketplace.


    I don't mind him taking advantage of the rules, but when he tries to immediately thereafter change the rules for his own personal benefit, I call foul.

  • Report this Comment On September 24, 2008, at 11:27 PM, DBrown7 wrote:


    I've actually heard Buffett advocate for a higher dividend tax rate. He has said he feels it's unfair that his secretary's tax rate his higher than his. I also don't remember him lobbying for the current rate structure unlike many other wealthy individuals.

    While I don't consider Buffett a religious icon, I don't have any reason to question his integrity. You apparently have a different opinion. Regarding his investment in Goldman Sachs, I don't feel it was made for his self interest. I think it was done in the interest of his shareholders to whom is is responsible as CEO of Berkshire. He certainly doesn't need the money.

    I don't think anyone enjoys the proposition of this massive bailout. But, remember there will be some recovery from the sale of these assets. I do remember that the final cost of the S&L bailout was far less than many had initially feared. I would hope that this will end up being the case this time around.

    Is this the best approach to solving the problem? I guess nobody knows for sure. I just happen to agree with Buffett, that it's the least of the potential evils. Only time will tell if it is the right approach. You are certainly entitled to your opinion and it could be validated in the long run.


  • Report this Comment On September 25, 2008, at 12:40 PM, RRGY2K wrote:

    My understanding is that this is all about liquidity, and I paint this hypothetical picture from that perspective. If you're a bank or insurance company, your assets are required by the regulators to ensure that you have the necessary resources to support your business. Those assets are watched carefully and must be valued according to recent sales.

    Among those assets are mortgage backed securities. The mess started when Wall Street's appetite for higher yields caused lenders to build higher yielding and riskier bundles of loans for them so that hedge fund managers could buy them on margin while failing to compensate for the higher risks that go with the higher yields. In the aftermath, there was a huge loss in confidence in all mortgage backed securities because of distrust for the mechanisms that had been used to value them. Suddenly, the market dried up. This created a worldwide crisis, because if you can't show the bean counters what you can sell an asset for, it must not be worth anything. And if it's not worth anything, the company is on the brink of failure because there are suddenly insufficient assets for the bankers to go on banking or the insurers to go on insuring, and the whole financial system seizes up.

    But these securities are worth something. The vast majority of mortgages continue to perform beautifully, secured by substantial underlying real estate value. Sure, foreclosures are running higher than in recent years, but they're still just a very small share of mortgages.

    So the Treasury Secretary is proposing to buy a whole bunch of these securities. Hopefully he's got a plan to buy them at a price that's discounted for reasonable loss expectations. And then, when things are back on track, the securities can be sold back into the market.

    The government accounting system knows about budgets, buying things, and what an asset is, but it doesn't understand business terms like selling, profit, income, or capital gains. So maybe to them and the news media, $700B worth of mortgage backed securities isn't much different than $700B worth of paper and typewriter ribbons for the Department of Agriculture or spare parts for fighter jets. And from that view, it looks like money down a rat hole instead of an asset purchase providing emergency liquidity to the financial system in a way that could actually yield a profit to the treasury, if it is done intelligently.

    Who's being bailed out? I think maybe we all are.

  • Report this Comment On September 25, 2008, at 3:38 PM, wrenchbender57 wrote:

    I don't think the banks and financial institutions should be "bailed out".

    They should surrender a large majority of their shares in exchange for the money we give them. We get the shares. In addition the leaders of these companies need to step down. New leadership would then be elected by the stockholders. I would expect that we, the taxpayers, would be heavily represented on the board. Probably by an appointed representative put on place by the government and charged with getting the institution back in financial shape and getting most of our investment back if possible.

    After the institution's financial house is in order they would operate under the banking laws that have been modified in the meantime. That way, hopefully this will not happen again in the future.

    At some point the goverment would sell off it's shares and recoup as much of our investment as possible.

  • Report this Comment On September 25, 2008, at 4:34 PM, TiltnSpill wrote:

    I work for a community bank that has never made one subprime mortgage. Less than 1% of our loans are past due and we are very well capitalized.

    It's sickening that the "hillbilly hick bank" that I work for won't see a penny of this bailout money while the "brains" on wall street will be rolling in it.

    The government should've broken up these institutions if them going bankrupt spelled economic disaster.

    Instead we are getting a knee-jerk reaction from congress that is only going to make this mess worse.

    Mark my words...

  • Report this Comment On September 26, 2008, at 2:22 AM, Browneyes312 wrote:

    So have we've learned a lesson people on what can happen when you outsource? Lost of jobs can create a terrible blow to the economy. Then when you cant make your payments, there goes the house and car. Cant buy a car? Hmmm? Didnt the auto industry send jobs to other countries? Now the auto industries are having problems trying to sell cars. Wait a minute gas prices went out of site and they cannot sell you a gas saving car. You dont make enough money working at a fast food place? Are you shopping at good will instead of your favorite department store? Oh wait they went bankrupt. I think its only fair if the gov. bails out these companies that we charge them interest. With that interest we should receive another stimulus check. With that check I might be able to pay my fuel bill. I mean when I took out a loan I had to pay interest for the money I borrowed. I dont believe we should make it a practice of bailing out every tom dick and harry who scams the system. After all its only good business practice.

  • Report this Comment On September 26, 2008, at 1:03 PM, adam173 wrote:

    Less government is better government. Show me something (besides space travel) that the government can do better than the private sector. These banks need to fail to bring long lasting and uninflated growth to our economy and stock market. I think letting the banks fail is the way to do this. I am heavily invested in the market there is nothing more I would like to see than my portfolio sky-rocket. But I don't want that at the expense of my capitalist views (and tax dollars). Besides capitalism is the reason we have a market to trade in the first place. 700,000,000,000 that's a lot of money which the government doesn't have to spead. If this is allowed to continue all of our taxes will be going to pay interest and there will be none left over for anything else. Please don't give us a short term fix for a long term problem. And you thought $147 oil is bad; how does $300 oil sound or $10 a load of bread. That is what will happen when the government prints a bunch of new money. When these companies fail there will be someone to fill the void (if there is a void).

  • Report this Comment On September 26, 2008, at 3:25 PM, spongeworthyusa wrote:

    Finally, someone from MF telling the plain truth about this massive taxpayer rip-off. Good job Chuck!

    If you haven't already, contact your representatives and tell them no more bailouts. Today. Monday may be too late.

  • Report this Comment On September 26, 2008, at 11:01 PM, Bullstothewall wrote:

    Use the link below to email your representative and senators and tell them NO CORPORATE WELFARE "BAIL OUT" AT TAXPAYER EXPENSE!!

  • Report this Comment On September 27, 2008, at 11:40 AM, dmcnic wrote:

    This is a horrible article. Enough that I wish there was the opposite of the Recommend! button -- the Avoid! button. This isn't a bailout. This is the biggest investment the government has made in the country's financial system. A bailout is a get out of jail free card. This is buying distressed assets and working them out. Is it any wonder that Bill Gross and Warren Buffett have volunteered to run the government's fund? I would want to as well.

    The government doesn't need to worry about the mark to market model. Nor do I. If these assets came onto a public exchange, I would be very interested in purchasing them because I have a very long term investment horizon.

    Look, the housing value in this country is not going to zero. Most mortgages are being re-paid on time. Careful analysis of these securities (like all investments) will show some sharply underpriced gems.

    The government and us owners of the government stand to make a large sum of money just like we did with the first Resolution Trust Corporation. Bailout? Not even close to correct.

  • Report this Comment On September 27, 2008, at 9:34 PM, realitycheck13 wrote:

    Your Tax Dollars at work.

    Looks like the United States isn't going to worry about hitting $10 trillion in national debt. They're going to skip 10 and go straight to $11 trillion in debt with what the government is planning on spending with these so called bailouts.

    Welcome to the socialist, with a tinge of....

  • Report this Comment On September 28, 2008, at 11:01 AM, TomBoston wrote:

    The U.S. banks have fleeced the little guy for at least 2 decades. The signs of greed and corruption started in the 80's. The last S&L collapse and the current sub-prime Mortgage collapse are the big picture. Here's the little picture: A picture of stealing from customers. In no other business, has an industry pinched the poor and Main St. American more. Four Examples:

    1) Charging for use of ATM's. The banks save billions of dollars in staff expenses and office overhead. Banks would have to hire a hundred thousand tellers and open thousands of offices to handle banking needs of the last 2 decades. Instead, for the minimal cost of running computers, and putting up machines, they are dispensing/collecting money without hiring employees saving benefits, salaries, hiring/firing. For this savings, banks CHARGE American customer a transaction fee! It should have been made illegal the minute it was conceived. Some charge as much as three dollars. This is fleecing. 2) No or little interest on savings accounts. The banks are so greedy, they give nothing to the depositors for the "safety" of holding and investing the depositors' money. Savings interest is often BELOW 1% annually. No one is motivated to save in a bank in America. 3) Bounced check charges. BofA is a good example in this abuse of the customer: They charge a whopping THIRTYFIVE dollars/bounced check. They don't take the checks in order of submittal, but rather in order of size in a day (sometimes across several days). The largest check is positioned by the bank to bounce and remove all the funds. Any other smaller checks, previously dated, then bounce. In the customers mind, they might be bouncing one check. But after BofA rearranges the withdrawal times, and a customer can accrue HUNDREDS of dollars because of an accounting slight of hand. It's a shell game run by grifters. 4) Deposit of funds. Banks hold checks that aren't drawn on their own funds, out-of-state (even from the same bank), cash deposits (from out-of-state) and have daytime limit rules of 4pm. All of these are intended to freeze the customers' money arbitrarily while banks use and invest that money. There is NO handing of on money with electronic banking. There's no reason to "FREEZE" deposits, except to let the bank abscond with it for 2 or three days. Banks have been screwing the poor and middle class in America for years. Now they're going for the big screw. I say, let them put up collateral for the loans, in the name of the American taxpayer, and give the profit back to the taxpayer until they are paid up. Screw the banks as they have gouged us. Or let them collapse.

  • Report this Comment On September 29, 2008, at 7:12 AM, realitycheck13 wrote:


    A Monday to Remember!

    The bailout is going to cost all of us and our children an amazing amount of money in the future. We as a country just can not afford to continue adding to a national deficit of what will be more than $11 Trillion by the end of this year.

    We fully understand the implications of no bailout. It is pretty much guaranteeing at this point that we and the rest of the world will drop into a 1930's type....

    continued at -

  • Report this Comment On September 29, 2008, at 3:49 PM, xpchristopher wrote:

    Let them fail

  • Report this Comment On October 01, 2008, at 12:01 PM, Reader134 wrote:

    You should throughly research any company before you start giving them your money and general support. In addition, if you're going to be giving advice about which corporations to support, you should be equally knowledgeable in the subject. There is a lot more than money in this world, and to financially support companies, like Coca Cola and Wal-mart, without due consideration to the human rights atrocities they commit is irresponsible and ignorant. To invest in a company solely for profit, without really even attempting to see where your money goes, is a bad practice. These huge corporations are allowed to get away with horrendous violations and abuses, OF HUMANS and not of fiscal policy, because we blindly invest and all we can see are our profit margins. Smart investing and knowing the company that you will be supporting, is a much better decision and one you can better your sleep at night.

  • Report this Comment On October 01, 2008, at 12:19 PM, dbbspill wrote:

    Today is one of the most important days in United States history. Congress is considering passing a bill that will enslave the entire U.S. population, including our children and our children’s children, with a massive debt that can never be paid back. This bill is meant to bail out a group of fat cat bankers who are now suffering the consequences of their predatory lending schemes. The bill the congress is voting on tonight still does not force any cap on the golden parachute that these fat cat CEOs will receive when they get bailed out by our tax money and our futures! We have already been victimized by the bankers and are suffering the consequences of their greed now. Don’t let them victimize us again. Use this link to find your state representatives.

    You can enter your zip code in the form to the left of the map and get the names of all of your local representatives along with their phone numbers and electronic correspondence addresses. Call them now! We only have a few hours to stop this tragedy!!

    If the above visit is too busy, try these, they work the same way.

  • Report this Comment On October 04, 2008, at 11:20 PM, Huskybytes wrote:

    I want to see the brokerage big wigs lined up like ENRON and their McMansions foreclosed upon. Turn their houses into timeshares for those of us that paid our student loans in full, pay our creditcards each month, contribute the maximum to our 401k while we work 70 hrs salaried.

    1995 they relaxed the immigration laws and students stayed here, taking jobs. They need to go back home so Americans are employed 100%. Tax the legal immigrants $1000 EACH and stop bothering them. Most are working hard in hotels & restaurants and doing jobs anyone with a college degree doesn't want to do anyways!

    Put Government offices on a 10 hr x 4 day workweek to save on energy resources & commuting costs. Do most transactions on-line or through our payroll taxes so except for annual taxes, we don't need all those clerks.

    Turn off the IRS and turn their offices into ICE to deport the illegals.

    Fire everyone in Congress and hire from only ivy league law schools, fresh n shiny new faces! Term limit of 5 yrs.NEXT

  • Report this Comment On November 26, 2008, at 8:47 PM, Simclan2 wrote:

    I'm just a working man trying to keep my head above water like everyone else. I have seen my 401k lose 50% of its value in the last couple of months. I'm not an Economist but I would like to add a simple solution to this bailout situation.I would appreciate any comments from people regarding this idea.What would happen if instead of this corporate bailout, the Government gave everyone in this country, all 300 Million American Citizens 1 Million dollars with the stipulation that they must pay off all of their Loans, including Mortgages, Credit Cards etc. Would this not stimulate the economy? The Good and Bad Mortgages would be paid off. All consumer credit would be gone. People would have plenty of money to purchase goods and services. My calculations show that this plan would only cost 300 Billion, not over a Trillion.

  • Report this Comment On November 30, 2008, at 4:15 PM, olgakh wrote:

    Our emotional pro-or-against bailout opinions still do not exempt us from the unpleasant responsibility we are trying to avoid – looking deeper into the reasons of the crisis, which means looking deeper into ourselves and out attitudes. The crisis is caused by our overgrown egoism pushing us to chase personal pleasures without considering other people and consequences such pursuit could bring about.

    If we don’t do it voluntarily, we’ll be forced to stop and analyze our behaviors by the crisis unfolding even further.

    More on the financial crisis, its reasons and the ways to resolve it is here -

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