The mother of the mother of all bailouts is quickly turning into not just one of the largest financial events in history, but a heated political argument as well. As we head into a vote on Capitol Hill this week, many, many questions still remain unanswered about how this plan is structured and whether it should be implemented at all.
You're bound to get a different viewpoint from almost anyone you ask, but here are a few thoughts on four of the chief areas of debate getting tossed around.
Myth: The proposed bailout will cost taxpayers at least $700 billion
The proposed $700 billion isn't a donation, a grant, or a gift -- it's an investment. The money will be used to purchase assets from banks at a steep discount to nominal value, and then sold down the road once the smoke clears. The proceeds from those sales will ... say it with me ... go back to the Treasury and pay off the debt issued for the bailout. It's completely reasonable to assume taxpayers could in fact profit from this venture in years to come if done properly, which is exactly why a group of us here at The Motley Fool demand equity stakes.
In fact, part of the updated proposal announced over the weekend specifically states, "In any case in which there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall ..."
Heck, even Warren Buffett weighed in on this topic, saying, "If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually."
Half-truth: This is a bailout of Wall Street
Oh, boy. I can already hear the keyboards furiously punching out the hate mail on this one. But please, hear me out. This is not a bailout of Wall Street: It's a bailout of the American financial system from a problem caused by Wall Street (as well as Main Street). There's a tremendous difference between the two.
First, ask the shareholders of AIG (NYSE: AIG ) , Freddie Mac (NYSE: FRE ) , or Fannie Mae (NYSE: FNM ) -- all three of which have undergone 95% declines in the past year -- if they feel they've been bailed out. The common shareholders of companies that took on extreme risk should be taken to the cleaners, as they have been. Again, that's why we've demanded equity stakes.
The portion that does get bailed out is the financial system that all Americans rely on whether they know it or not. From grocery stores that rely on lines of credit to stock their shelves to small businesses that rely on credit to make payroll every month, there truly isn't an inch of the economy that wouldn't get sucked down the tubes in one way or another if the financial system were allowed to collapse.
Inconsistency: The economy won't implode if a big bank goes under
After all, we hear that "Lehman Brothers was allowed to go bankrupt and the world didn't come to an end." I can see why this is a widely held belief, but let's dig a little further into the events of two weeks ago. Lehman Brothers went belly-up sometime Sunday afternoon. By Sunday evening, Merrill Lynch (NYSE: MER ) had to be hastily thrown into Bank of America's (NYSE: BAC ) arms. By Tuesday, AIG had imploded. By Thursday, Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) were on the brink of collapse.
I'll go out on a limb and assume that four once-in-a-lifetime events happening within 96 hours of each other wasn't a coincidence. The only thing that stopped the domino-style financial meltdown was word that the mother of all bailouts was taking shape. Like it or not, many of these companies truly are too big to fail.
Inconsistency: Let 'em fail; the sooner they die, the sooner we recover
Hogwash. "Tough medicine" makes sense insofar as the medicine isn't so tough that it kills you. The big factor that needs to be addressed here is that foreigners own more than one-quarter of all the public debt in America, which in effect gives them the ability to send the financial system into Armageddon if they sense that our financial fortitude teeters on collapse.
Any large-scale fallout in the financial sector could give foreigners a good reason to start dumping treasuries en masse, causing a bank run on the largest debtor in the world: the U.S. government. There is no doubt that such a run would push the value of the dollar to unimaginable lows, as well as cause a domestic credit crisis to boil into a currency meltdown. Such a meltdown would make any recovery several orders of magnitude more difficult than it would be with the bailout.
In all fairness, issuing $700 billion will have a seriously negative affect on the value of the dollar as well, but it pales in comparison to the amount of carnage foreign investors could bring if they gave up on us. Relying on the kindness of strangers is a tough spot to be in, people.
Please, speak up
We're all very interested in your thoughts as well. Feel free to speak up on the discussion board that debates the historic events of the past two weeks.
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