Some Tough Questions on the Bailout

As a lad in my early 20s, with a still-drying college degree under my arm and U.S. Marine Corps discharge papers stuffed into my pocket, I went to work on Wall Street. Actually that's not completely correct. My job was on Exchange Place, one block over.

In any event, those were the halcyon days, when big financial firms still possessed both integrity and competence, and hadn't yet learned how to get themselves (and all of us, as well) into the soup by being too smart by half. Those days have long since disappeared. The result is that Treasury Secretary Hank Paulson -- who gave more public performances Sunday morning than Mick Jagger has in a lifetime -- and a host of congressional types are attempting to shape a bailout package that's certain to be part national economic life preserver and part taxpayer rip-off.

The basics of the program have already been well-publicized: The Treasury Department, using your money, will buy up smelly paper from the nation's banks, and once the dust has settled and (perhaps) the odor has diminished somewhat, return it to the private sector -- or maybe to Secretary Paulson's backyard.

But as this thing takes apparent shape, I'm left with a few questions -- questions that may mirror the ones you're rhetorically asking yourself or your shoulder-shrugging spouse:

Congressional involvement
Should the $700 billion program be overseen by representatives of the Congress? Both Republicans and Democrats seem to think it should, and they're probably correct in their rare bipartisan agreement. But I'd remind you that doing so could create the same sort of public-private partnership that eventually led to the abuses that brought down Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) .

Is anyone held accountable for their actions in the U.S. of A. any longer? Apparently not. Or better yet, we may have managed to locate financial and economic nirvana: capitalism on the way up and socialism on the way down.

How big will it be?
Will $700 billion be anywhere close to the real outlay for the bailout? Not if you observe the lengthening line of those who'd like a piece of the salvation pie. At last count, that line included -- in addition to the Bank of Americas (NYSE: BAC  ) and J.P. Morgan Chases (NYSE: JPM  ) of the world -- thousands of community banks that have made imprudent land and construction loans, and -- get this -- such foreign institutions as Deutsche Bank (NYSE: DB  ) and UBS (NYSE: UBS  ) .

The latter group seeks inclusion simply because they employ folks and do business in the States. Oh, and I almost forgot to mention that a group of auto-finance companies would like at least a morsel of the handout as well.

Who's crying now?
Are such groups as mortgage originators, primary lenders, securitizers, rating agencies, and buyers of the collateralized paper laughing up their sleeves, or have they limped off into ignominy? Probably neither. Quite clearly, McGraw-Hill's (NYSE: MHP  ) Standard & Poor's unit and its peers, for instance -- who swung and missed like my grandmother in Yankees pinstripes -- continue to pretend that what they do is both creditable and valid. I suppose my biggest surprise as it relates to this massive mortgage stench is the total lack of discussion about comeuppances for those who clearly checked their diligence and their professionalism at the door.

How many times will buyers who bit off bigger mortgages than they could chew receive our help? That's an excellent question with an answer that’s apparently still developing. Not long ago, we passed the Housing and Economic Recovery Act of 2008, which has yet to be implemented. But now some are pushing for fresh bailout help for homeowners facing foreclosure. I personally hate to see anyone forced from their home because of an inability to cough up enough each month to pay their mortgage tab. But the reality is that, because our system was tragically flawed, some folks are in houses that their incomes don't -- and can't -- support.

Charity begins at home
I make my mortgage payment right on time each month and have never even considered stiffing a bank or other lending institution. What's in all this for me? An opportunity to do unto others.

What will the result be when those who finance our national debt have had enough of our profligate ways? First, let's agree that we're talking about China, Japan, and a host of other countries that buy much of the Treasury paper that we issue under our borrow-and-spend approach to economic management. The best answer I can give to the basic question here is that, unless and until we get our act together regarding our domestic economic circumstances, we're cruising for an abrupt bruising from our traditional sources of debt funding.

The bailout proposal also calls for the U.S. public debt limit to be raised to $11.3 trillion -- the second such increase this year. How should that under-reported bit of news make us feel? Wretched and ashamed.

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Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned above. He does, however, welcome your comments, questions, or criticism. JPMorgan Chase and Bank of America are Motley Fool Income Investor picks. The McGraw-Hill Companies is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2008, at 4:49 PM, jmt587 wrote:

    $11.3 Trillion? That's about $40k each (every man, woman, and child), right? Wow.

  • Report this Comment On September 23, 2008, at 4:50 PM, rp518fool wrote:

    Treasury SecretaryPaulson has demanded complete control and authority to implement the White House plan... and has demanded that Congress and the Courts be prevented from questioning any decision he may make. This is the same crew who protected our nation by placing FEMA under the Department of Homeland Security then prepared for and responded to the Katrina disaster with a demonstration of expertise that truly left the world in awe.

    Is anyone ready for more "shock and awe"?

  • Report this Comment On September 23, 2008, at 4:52 PM, jmt587 wrote:

    That definitely does make me feel rather wretched. I wonder how I will be forced to pay for my piece (i.e. what combination of inflation, tax increases, etc. it will take). I demand a balanced budget now (wars included).

  • Report this Comment On September 23, 2008, at 5:08 PM, rp518fool wrote:

    Love to see that. Would the wars we're in abroad be less scary than the one's we'd start at home if our government was forced to choose between raising taxes and cutting Social Security, Medicaid, and Medicare? Try to cut welfare to ADM and Cargill and see what happens.

    I'm for it, but it wouldn't be fun to live through.

  • Report this Comment On September 23, 2008, at 5:21 PM, rp518fool wrote:

    Here's a quote from the three page summary of the plan Bernanke wants congress to approve, "before it's too late".

    "Section 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

  • Report this Comment On September 23, 2008, at 6:10 PM, BeDeviled wrote:

    PLEASE, someone, help me understand:

    WHY, knowing of the impending foreclosure induced economic apocalypse, would the Housing & Economic Recovery Act of 2008 not take effect October 1st. I am guessing due to the start of the new fiscal year?

    At the hearing today, I would swear someone quoted a figure of 10,000 foreclosures each DAY. If that is correct and knowing that this financial unraveling is due to the foreclosures / failing housing market death spiral, why WAIT??? And, WHY wouldn't they have included provisions enabling bankruptcy judges to work out / modify mortgage terms?

    I don't understand, and it infuriates me to hear that our experts truly have nothing more than HOPE that a trillion dollars may help. I don't want to hear about mysterious "complex mechanisms" nor do I want to hear that Paulson noticed as soon as he took the job that there was "ZERO" oversight, yet chose to do nothing. Something tells me that the same "geniuses" who figured out how to cause rolling black outs by selling California's energy out of the state and back in order to make more money are responsible for these "complex mechanisms" that no one in charge seems able to grasp.

    And, people were worried about that new superconductor / accelerator thing opening up a BLACK HOLE.

  • Report this Comment On September 23, 2008, at 6:16 PM, jkipling wrote:

    Two things. One all these questions are very prudent and on the tip of my tounge as well. I'm at least comforted that the Congress wants to ask them too. Sometime's I'm a big fan of Congress and this is one of those times. They have every right to take as long as they want to consider spending this amount of money. To expect them to have this passed in a week is ridiculous and should also raise a red-flag as to the intentions of the Fed and the Treasury. We're not going to go from now to the Great Depression in a week, let's have some time to think about introducing this amount of socialism into our supposedly free country. I hope the Congress continues to hold hearings and debates until we get to the root causes (not symptoms) of this problem and that whatever legislation is passed includes measures to alleviate that.

    Second. I agree China and Japan funds most of our debt, but what specifically do you think an "abrupt bruising" will entail. If we don't and are unable to pay back our debts, I'm concerned we may be looking at best case, annexation by China, worst case WW3.

    Maybe around 2050 or so, unless we do get our act together.

  • Report this Comment On September 23, 2008, at 7:32 PM, Slugger4U wrote:

    The way to get the economy back on track is to spend money on creating assets. That means putting folks to work to create items that other folks want/need/use. We have States that need funds that can be used on necessary services for their residents,

    there are serious infrastructure problems all over the U. S.

    In the last Depression, FDR realized we needed to get people back to work. Spend the money on creating jobs, and the economy will take care of itself.

    Spending money for nothing is doubly Stupid adn won't cure the problem.

  • Report this Comment On September 23, 2008, at 11:27 PM, txstjohn wrote:

    What do you mean "...part taxpayer rip-off."? Sen. Bunning is correct. It's nothing more than financial socialism.

  • Report this Comment On September 24, 2008, at 11:40 AM, richman1211 wrote:

    This idea from reknowned economist Brian Wesbury should get more attention.

    http://www.ftportfolios.com/Commentary/EconomicResearch/2008...

  • Report this Comment On September 24, 2008, at 1:20 PM, ButtSauce wrote:

    Why not look at how the Swiss solved their housing bubble and bank freeze - they had the same crisis in the 90's. You bail banks out by offering them the money, but each dolar you give a bank gives the government one dollar of ownership of the company. The banks that were stable enough wanted no part of that, so they straightened their finances out over 5-10 years by themselves. The ones that couldn't had no choice. The government didn't even use taxpayer money, and they broke even after the smoke cleared. We are getting scammed by the cultural elite that run the Fed. Do a Google search and take a look at what families own the Fed and the not-so-nice things they've tried to do over the years. Remember, our own government encouraged banks to behave in this way - "ownersip society" and they advised lenders to loosen their standards. And now they are trying push this bail out through at lightning speed. This is an emerging pattern with this administration.

    Oh yeah, why not try total transparency and return the leverage rate from 30 to 1 (GS, whom everyone here at CAPs adores) has a ratio at about this) to some more reasonable like 12 to 1? We are seriously devolving into a nation of reckless imbeciles. We already did this over-leveraged bit back in Great Depression.

  • Report this Comment On September 24, 2008, at 5:41 PM, GoNuke wrote:

    The bailout has to be accompanied by regulatory reforms that prevent this from happening again.

    There are lots of valid philosophical reasons for opposing the bailout but ultimately the US and its citizens will be better off if the economy keeps going. If there is a serious risk of depression then it would be foolhardy not to stop it now.

    Fairness and blame aren't the issues here. Staving off a depression is.

    The further the economy tumbles the lower house prices will fall and the larger the number of mortgages will be in default.

    Stop the downward spiral. Maximize wealth generation and tax the wealth to pay for the nation's economic folly.

    The reputation of the US economy is at stake, the "US" brand is tarnished both at home and abroad. The US needs to restore confidence in its system.

  • Report this Comment On September 26, 2008, at 1:37 PM, bevhill wrote:

    Let Wall Street burn and Main Street with it. Companies do not need to borrow any money to stay a float. If they do need to borrow, send them to India, China or wherever else they have sent the American jobs to. Every company that I do business with except for mortgage companies have outsourced their customer service to another country. Who does customer service for Macy's, Nextel, Timewarner Cable etc...and you wonder why the unemployment rate is high and Americans don't have money. We spend our money here and the jobs are elsewhere. The common fool could solve this problem. Why does it take so many so called leaders to try to figure it out. If our leaders are stupid enough to want 700 billion dollars to keep feeding companies that are sending the money to foreign countries, then the citizens of the USA need to apply for visas and get the hell out of here. Just a thought.

  • Report this Comment On September 26, 2008, at 1:39 PM, spongeworthyusa wrote:

    "An opportunity to do unto others."

    Is this some kind of joke? The only reason you can give to people like me who have not gotten over our heads in debt or participated in the orgy of greed leading us to this day is we ought to support this Wall Street fat cat bailout because we're good Christians?

    You're not a fool, David Lee Smith, you're an idiot.

  • Report this Comment On September 27, 2008, at 1:01 AM, adri68 wrote:

    It is difficult for me to believe that there are so many people, who equate socialism with some type of un-free country or economy. I lived in one of the best "socialist" countries for 16 years, France, I was able to invest how I choose to, my children went to an excellent public school in an average neighboorhood, and my husband and I each collected un-employment insurance and saw 20% of our salaries deducted for all these types of "socialist" concepts, and some how the French, yes they have a decficit, do not allow people to borrow more than 33 perent of their income and have very strict rules on lending, manage to offer government subsidized 0% loansto encourage home ownership, and live very very well in general and are not trillons of dollars into debt with countries like China. How do those crazy "socialist froggies" do it? Because it works, so I would tell all of you out their to try a different approach and look at examples other than the American way which clearly is a total failure.

  • Report this Comment On September 27, 2008, at 3:49 AM, AdNoah2 wrote:

    Since the govt had already taken over Fannie Mae and Freddie Mac, we should just take that $700B and fund both corporations to refinance troubled homeoweners to 5% fix rates. This would still accomplish what the govt wants to do which is taking the bad (greed-induced high-interest home loans) from the commercial banks. Everybody who refinances would then have a lower monthly payment which should free up some cash. The freed-up cash would then spur spending or savings that should stiimulate the economy. The govt then makes 5% which benefits the taxpayers.

    While were at it, we should take the money we are spending on our war with Iraq and spend that by installing solar panels on every roof in these United States and subsidize hybrid or electric vehicles. The solar systems on our roofs would decrease the cost of electricity and with the car subsidies, would inspire more people to buy electric or hybrid cars. This should then decrease our dependence on foreign oil. As the demand for oil decreases, oil prices should get cheaper.

  • Report this Comment On September 27, 2008, at 7:38 PM, ddg944 wrote:

    My sympathies lie with that group whose general (and economic and lifestyle) choices put them among those who would conform to the first paragraph under the caption, "Charity begins at home."

    One problem is that there are far too many managers parading around this world as leaders. There are only two ways to lead, by inspiration and by example, and they are not mutually exclusive. Further, one LEADS people, one manages THINGS.

    The point is that managing people, more often than not, turns out to be manipulation. Further, leading just plainly and simply requires much more integrity and self discipline than managing. Leaders are much more likely, for instance, to pass the test, so to speak, "nobody cares what you think until s/he thinks that you care" than parading managers. There is just NOTHING which can justify privatizing profits and socializing losses. The Wall Street "leaders", it has been essentially said, will balk if their "packages" are threatened.

  • Report this Comment On September 27, 2008, at 10:35 PM, Mandragoran75 wrote:

    When we say bailout, let's remember that so far, we have not prevented the market from punishing the owners and, to a great extent, the managers, of the failed companies. Stockholders have lost 90% or more of their investments, and a lot of the executives lost a lot of money with that stock.

    One of the best things that can be said for the current plan, whether as originally conceived or modified along the lines of what the Republicans (such as former Speaker Gingrich) are proposing, is that any money we put in would be secured by the assets of the bailed companies and/or by equity in those companies. If we can buy the bundled loans on the cheap, the actual cost after recovery may be much less than the initial $700 billion. That is also the reason why that amount of money may cover far more than that amount of loans as counted at their original face value.

    Long term, the most important thing may be to get the pork and corruption out of the bill, such as welfare for trial lawyers, and funding for Acorn, which specializes in voter fraud to elect Democrats.

  • Report this Comment On September 28, 2008, at 9:39 PM, me3tv wrote:

    mandragoran75 has some good points. That Acorn thing will bite us in the end. How do those Dems that pushed HARD to kill off any R proposed regulation and reform the last 7 years have the pure hubris to extract THAT chunk of money out of the package? It seems the R's are having a hard time getting anything into this bill. I do think in five years the recovery resulting from this will return the 700Billion to the taxpayers plus "profit". The issue becomes the Acorns etc that will lock onto the cash before it can be used to reduce the deficit. I'm going to visit some NJ cemeteries and see if I can get some of those long dead Rev War soldiers registered to vote at R's as some kind of counter to the blue paint in this state -- and all over this bail-out bill. R's sucking for air here - and have since the spit congress soon after Bush got elected. I guess with Pelosi at the microphone - that is all the voters are going to hear. All that said - I do have hopes this package will have a good effect and will eventually pay itself out.

  • Report this Comment On September 29, 2008, at 7:14 AM, realitycheck13 wrote:

    GREAT ARTICLE BELOW

    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 -

    www.mortgagebreakdown.com

  • Report this Comment On September 29, 2008, at 4:26 PM, MorrisP wrote:

    So Here is a thought: Who is going to finance the 700 billion dollars? Who is going to buy the Government bonds or notes? What interest do they get? Can us ordinary citizens buy these?

    Wouldn't it be nice if the Government would offer say $150,000. per taxpayer to invest in Government borrowing at say even 5% interest, tax free?? Let us have a save place to put our investments, with a solid return. Hmmmmmm Still feels like the rich position themselves to win either way...and this feels about the same.

  • Report this Comment On September 29, 2008, at 11:26 PM, sb101cu wrote:

    See the movie http://www.iousathemovie.com, where the bi-partisan law makers and bankers have given the prognosis if not the diagnosis of things to come. Wait till 2040, when the social security and medicare goes bust. The financial crisis of today,in USA,is just the TIP of the iceberg. It is an irony, that the family unit (in USA) over the last three decade has gone SMALLER and the houses have gone BIGGER. Something to think

    about...

    The world is getting "flatter", and USA is losing is technological edge in the information age. The number of PHD'S of native citizens in computer science is is getting smaller, and those foreigners who do earn their PHD'S here are going back home or to Europe.

    The " BRAIN DRAIN" is more important than the "FINANCIAL DRAIN" in the longer term perspective, as Adam Smith said in "The wealth of the Nations", it is the people, the quality of human capital that is COMPARATIVELY more important than the financial and political capital. USA already has lost the political capital in the world, this is Bush's legacy

    I would love to hear the comments of others. Thanks

  • Report this Comment On September 29, 2008, at 11:27 PM, sb101cu wrote:

    See the movie http://www.iousathemovie.com, where the bi-partisan law makers and bankers have given the prognosis if not the diagnosis of things to come. Wait till 2040, when the social security and medicare goes bust. The financial crisis of today,in USA,is just the TIP of the iceberg. It is an irony, that the family unit (in USA) over the last three decade has gone SMALLER and the houses have gone BIGGER. Something to think

    about...

    The world is getting "flatter", and USA is losing is technological edge in the information age. The number of PHD'S of native citizens in computer science is is getting smaller, and those foreigners who do earn their PHD'S here are going back home or to Europe.

    The " BRAIN DRAIN" is more important than the "FINANCIAL DRAIN" in the longer term perspective, as Adam Smith said in "The wealth of the Nations", it is the people, the quality of human capital that is COMPARATIVELY more important than the financial and political capital. USA already has lost the political capital in the world, this is Bush's legacy

    I would love to hear the comments of others. Thanks

  • Report this Comment On September 30, 2008, at 1:57 PM, nbar wrote:

    Great article! Keep up the good work!

  • Report this Comment On October 01, 2008, at 11:32 AM, Robert685 wrote:

    LET THEM FAIL!!!

    Capitalism is supposed to be about success and failure!

    What happened to the BASIC Economic Principles that Republicans, for GENERATIONS have based their platform. What happened to being a Reagan Republican? Why do the rules change when "Corporate America" needs a Bail Out.

    It is COMPLETE FALSEHOOD to believe this nation needs this!!!

    Banks EXIST to LOAN MONEY. To suggest that bank liquidity will SEIZE UP---is NOTHING BUT A LIE!! It is seizing up because they are playing POLITICS and PULLING STRINGS.

    They are saying "CHECK"---I say we say "CHECK MATE"---and let them fail.

    MY BIRTH RIGHT (i.e. Inheritance)--is tied up in Goldman, Wachovia (*was), Bank of America, Lehman (*was), among many other "safe" havens for investment--called Financials.

    I TRULY have a "VESTED" interest in hoping Banks succeed, but you know what. For the HEALTH and FUTURE of AMERICA. WE CANNOT ALLOW THIS TO HAPPEN!!! We cannot buy into this BAIL OUT is about "Keeping people in their homes...it's complete B.S.!!!!! it's ALL LIES!!!!!!!!!!!!!

    37% of Americans own their homes FREE AND CLEAR.

    94% of Americans Pay their mortgages on Time.

    Why are we taking $1 TRILLION to save loans that never should have been written in the first place...and BOND INSURANCE that was a LIE in which that NEVER EXISTED!!!! PUT THEM IN JAIL, BUT DO NOT BAIL THEM OUT!!

    Finally, I would like to end with this question. My father is a Commercial/Residential Investor. Recently he had to foreclose on a $600,000 loan that he PERSONALLY wrote for one of his properties.

    Why is he not included in this bail out so he can get this "Toxic Debt" off his Corporate books???

  • Report this Comment On October 01, 2008, at 7:14 PM, Robert685 wrote:

    HILARIOUS!!!

    Best Advice I've heard on what to do in this Market.

    CNBC advice to viewers as to what were the best positions to be in to

    ride out the market storm.

    "Cash and fetal"

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