The Bailout: Myths, Half-Truths, and Inconsistencies

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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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Bank of America is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.

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Comments from our Foolish Readers

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  • Report this Comment On September 29, 2008, at 2:34 PM, Brettze wrote:

    It is getting harder and harder for our economy to recover from next downcycle as long as we keep buying stuff made overseas. We are also exporting jobs overseas . Our trade deficit is looming larger and larger every month. We dont want to pay union workers with lofty wages and benefits. Buying American made stuff is inflationary and we thought we need to balance out with more imports made from overseas to help control inflation. We turn around and speculate in real estate price appreciation (American made homes equal inflation). We depend on imported oil to keep our economy powered without bothering to seek for alternate energy sources because they were expensive. Americans are turning our heads like owls !! Our heads broke off and rolling down the slopes!!

  • Report this Comment On September 29, 2008, at 2:38 PM, Brettze wrote:

    We are still buying 13 million cars and we are not concerned about our economy as over half of us are still buying imports... This is the wrong time to choose imports regardlessly of its criterias. We can shore up GM and Ford just by passing import dealerships and buy American made cars... Just buy enough cars to get GM and Ford back on track before returning to the normal buying patterns ... This is not the time to compare imports and GM and Ford. Just buy GM or Ford cars, dammit!! Our economy needs every job and every sale it can get.... We are importing 3-4 million cars we cant use to help our economy except selling them for overseas...

  • Report this Comment On September 29, 2008, at 2:39 PM, Brettze wrote:

    Any American who still buys imports are not concerned at all about our economy , simple as that... Lack of conscience!

  • Report this Comment On September 29, 2008, at 2:43 PM, jsl4980 wrote:

    Please add a myth to the beginning:

    Myth: The government has $700 billion to spend.

  • Report this Comment On September 29, 2008, at 2:45 PM, jsl4980 wrote:

    Hey don't blame Americans for buying imports, blame the idiots over and Ford and GM for making vehicles with horrible gas mileage while gas is approaching $4/gallon. The smart companies: Toyota, Honda, Hyundai, Kia, and VW make great cars with great gas mileage.

  • Report this Comment On September 29, 2008, at 3:37 PM, TrailerParkJawa wrote:

    I fail to understand why it is my "duty" to buy a car that doesn't suit my needs or tastes in order to keep domestic car companies in business.

    I don't expect any of you to buy my companies products just to protect my job or the economy. (Yes, I work for an American company).

    There can be nothing more "Un-American" than expecting me to shell out my own personal money for a product I don't want.

  • Report this Comment On September 29, 2008, at 4:12 PM, HKendrick wrote:

    "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,"


    If this is true, please explain to me why we need the bailout in the first place. In other words, if there is money to be made here, why isn't the market scrambling to make it already?



  • Report this Comment On September 29, 2008, at 4:19 PM, KyyaL wrote:

    I'm still green about investment, so please dont quote me about what I put down. However, this article does make a lot of sense. It has pointed out one important fact in the U.S. economy. We do rely pretty heavily on foreign investments to expand. Let's think about it, I do not know the exact numbers but I know one thing and I'm sure that most people here will agree with me. Most Americans are debtors, I bet we all know at least one person in our lives whos' in debt. In order to expand we need investments. We need capital and we get a large chunk of them from foreign investors. So if we allow the economy to collapse it will cause foreign investors to lose faith in the U.S. economy. They will find some other places to invest their money in. Therefore, it may cause our economy to slow down may be even dragging our the recession and we may not be able to recover completely. It may not be this bail-out but we do need some kinds of plans to save the United States economy and its credibility.

  • Report this Comment On September 29, 2008, at 5:19 PM, Lumindanu wrote:

    The article states:

    "...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 ..."

    In fact, if the Congress were serious about recouping, that bill's language would state: "...the Dept. of the Treasury shall recoup, using the authorities provided in this measure."

    The fact that no such language exists means:

    they aren't serious about recouping, they could not reach agreement on it, and it won't happen ... now or later.

  • Report this Comment On September 29, 2008, at 5:46 PM, trgeorge wrote:

    "It's completely reasonable to assume taxpayers could in fact profit from this" -- BWAAAAAAAA!!!!! AAHHHH HAA HAHAAAA!!!! Are you serious?? Hahaha. Taxpayers profiting from this. Please stop. I thought this was a serious article for a second there.

  • Report this Comment On September 29, 2008, at 5:50 PM, trgeorge wrote:

    Also, you forgot the sky falling on your head and crushing you in your last scenario.

  • Report this Comment On September 29, 2008, at 6:04 PM, WilyInvestor wrote:

    Yeah I take issue with the following quote: "It's completely reasonable to assume taxpayers could in fact profit from this venture in years to come if done properly." What?! The investment the government will be making is buying the "bad debt." It's bad because it's worth less than what it is selling for.

    This investment strategy is what I would call anti-value investing. Instead of looking for stocks worth more than their current stock price, let's go buy stocks that are definitely worth less than their current stock price. Would you guys run a screen on that investment strategy and let me know if it actually works or just bankrupts you?

  • Report this Comment On September 29, 2008, at 6:29 PM, cdanj wrote:

    I will probably show how naive I am with this post but who cares and here goes.

    I look at this as an opportunity for the government to become a landlord. If I had a chance to buy a home (which I gather that most of these bad debts are homes) for $.50 on the dollar; then turn around a rent it out at fair market price (after all there are probably alot of renters out there) to make expenses; then sell when the market recovers, I would jump at this. I'm not talking about the government making a killing here, just covering expenses. Maybe even, the government could credit the renter his rent payments as partial downpayments to assume the mortgage on down the road (making sure he qualifies!). Or maybe the government could insure these properties so that you and I could become landlords.

    Just a thought...

  • Report this Comment On September 29, 2008, at 6:43 PM, thibbist wrote:

    My question is how do you get the government to rein in their spending on the war, on sending billions in aid to undeserving countries, to cut back so this $700 billion can come from the government and not the taxpayers, Also, no one ever addresses the millions of dollars the government will spend just to administer this bailout. How can we afford a golden parachute to the financial world, when the average taxpayer is starting to hurt. The government should remove the penalties on using your 401K or IRA's to make your mortgage payments, if the mortgages are what got the financial markets into such a mess. There are other solutions which would benefit the taxpayer, not just strip more money from us.

  • Report this Comment On September 29, 2008, at 6:50 PM, GoNuke wrote:

    I tire of this. The term bad debt is not appropriate here because the mortgage backed securities are secured by some bad debt and a lot of good debt. Until the real value of these instruments is figured out they have a market value of near zero simply because nobody will buy them. We need an investor with guts to buy these securities at discounted prices and unravel them.

    One of the reasons that people are defaulting on mortgages is that house prices have fallen so far. There isn't enough liquidity in the market to lend money to buy houses which is pushing house prices down further. The frozen capital markets are making the situation much worse than it need be.

    By unfreezing the market the government will, by its very actions, increase the value of the assets it is buying. It will get them at a discount so the opportunity for profit is very real. The government is the only institution that can pull this off.

    Once the housing market stabilizes the value of these assets will rise.

    If unemployment rises then house prices will fall further and more debt will go bad. The rescue package could prevent this from happening.

  • Report this Comment On September 29, 2008, at 7:35 PM, CourtlandB wrote:

    Couple of things; what is a import? My Honda was built in Ohio.

    Second, I've been in the mortgage business for 15 years doing legitimate business. Over 10 years ago, I attended the Indiana Mortgage Brokers convention and laughed at the people running the show who were saying "we want to get the fraud out of the business." What a joke. If they wanted to, they could have. Go look at all the jacked up appraisals with fraudulent comps that dramatically increased the "value" of homes. What the bailout doesn't consider is that many (a whole lot) of the bad loans are not because values have decreased, it's because they were so over inflated in the first place. Then put in the 100% financing... and we have a mess... I could give a lot more examples but in the midwest, it's been over inflated appraisals, out in California, Arizona, Florida, it's been "alleged appreciation/value." Please... Uncle ain't getting his money back...

  • Report this Comment On September 29, 2008, at 7:48 PM, smittywood wrote:

    "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"

    HAHAHAHA! Can anyone seriously give me one - just one example of something the gov't has done right?? Do we really think this will be any different?

    After all, who got us in this mess in the first place? It was Washington politicians that mandated loans be made to people that couldn't afford them - all in the name of political correctness.

    Now these same people are going to fix the mess they got us in?? This is just too silly.

    Wake up people! Anytime the gov't gets involved it screws things up! Period!

  • Report this Comment On September 29, 2008, at 8:30 PM, HKendrick wrote:

    "The government is the only institution that can pull this off."


    Please explain why this is the case. Why can't other entities pull this off? Because they can't get the capital together to do it? And why would that be? Because no lenders trust the value of these assets, on their own balance sheets or anyone elses? Perhaps? See the circularity here.

    If these assets were so obviously undervalued, why is the government the only institution that can value them properly?

    In my mind, this line of reasoning flies in the face of logic and common sense.



  • Report this Comment On September 29, 2008, at 8:34 PM, arni0202 wrote:

    While I'm glad this draft of the Federal Investment Plan didn't go through something needs to be done. Beyond simply throwing nonexistent money at the issue, there needs to be restructuring of our financial institutions. And 100% accountability on the people responsible for this mess. Yes mainstreet had a hand in it, borrowing beyond their means and defaulting, but they're feeling the accountability in terms of foreclosings and bankruptcy so I ask, gentlemen, why sit back and accept something as soon as possible, instead of sitting down with congress(who hadn't consulted any experts in the financial field when they drew up the plan) and help them get something passed that helps most and hurts least. this plan had so many loose ends it's insane! Too much power given to the wrong people. and pathetic oversight

  • Report this Comment On September 29, 2008, at 8:46 PM, jharsh wrote:

    "The proceeds from those sales will ... say it with me ... go back to the Treasury and pay off the debt issued for the bailout."

    If you believe this, you're truly naive.

    "The income tax will only affect the richest 1% of Americans, and only on capital gains, never on wages."

    "Social Security taxes will only go toward funding Social Security, not into the general fund."

  • Report this Comment On September 29, 2008, at 9:56 PM, jrosent wrote:

    I'm with jharsh. Everything I've seen shows that lawmakers are already adding equivocating terms in the language such as, "most," when referring to how any proceeds will be spent. I have not seen "all proceeds will go to the national debt." But, I have seen "most ... ." They're already planning more mindless spending with potential proceeds from a bailout that may never pass.

  • Report this Comment On September 29, 2008, at 11:03 PM, bushkeus wrote:

    THERE SHOULD BE NO BAILOUT! This bailout is wrong on so many levels. The list of scare tactics that the politicians have tried to use to get us to support this is outrageous. Foreclose, banks can't loan money, families destroyed. It's all Bull. Those of use that have been responsible will still be able to get credit and will weather this storm.

    I don't care if I lose my job, my home, and I have to stand in a line to purchase food, I will never approve this bail out!

  • Report this Comment On September 30, 2008, at 12:22 AM, Gingerbreadman55 wrote:

    If there is a definite chance of making money then why doesn't the market sector step in and do it?

    Of course, the obvious answer is that its because all of the banks have these bad assets, but if these were good investments private investors would be drooling for them.

    Too bad they are junk. If government wants them, they should get them for the market value. Hold on, Compromise. 50% premium on market value!

    = 33 cents on the dollar (22 cents *1.5)

  • Report this Comment On September 30, 2008, at 12:55 AM, Tinka82 wrote:

    I'm afraid I've got a pessimistic view point on several levels here. Where to start....First off, I will disclose that I do not know the true assets that lie in these mortgage backed security assets that no one else will touch, but I'm going to take a stab. I'm going to say I'm probably not far off, as we're told that these are so bad that no one else will buy them.

    Probably be low down/no down payment, minimal credit/employment documentation loans. AKA minimal equity liar's loans. Let's say these are secured by homes in the worst hit areas - Florida, Phoenix, California, Michigan.

    So, we're hearing the government is buying these for discounted rates. Much of the hooha has been about the valuation process. This is well founded. I'm a residential appraiser, and I can tell you from the trenches, there is definitely reason to quibble that point. Fannie/Freddie, Countrywide, B of A, Wells Fargo, and many, many others have taken a fondness for computer valuation models over the past several years. They are fast and cheap, but mind you, we're taking the word of the borrower on condition, size, and other specifics about the property. Additionally, these Automated Valuation Models are only as good as their input and operators, which is questionable at best. Who knows if these assets were valued by a computer or a real live person, but in the recent boom times, the pressure was on real estate appraisers to bow to the old 'wink, wink, nod, we'll send ya more business if you can make this one work for us, Buddy!'

    Many appraisers didn't comprimise ethics, but there were enough that did to enable these unscrupulous loan officers to cause us all problems, as we can now see and understand.

    So, whatever the actual case, you now have an insider's view of what 'assets' may be in these mortgage backed securities. Incredibly shifty loans secured by questionable valued assets, even questionable value for the time the loan was written. That doesn't account for the losses already incurred in real estate values in many markets. No one has the time to go back and re-appraise the homes at this juncture for a more accurate assesment unfortunately.

    Now, if that weren't bad enough, let's look at the valuation methods over the past several years that applied to the mortgage bonds. Much the same as the lender's AVM, only geared toward the bond issues. Computer generated models, and in today's retrospective view financial gurus are now admitting that these models weren't the most accurate method available. This is the 'mark to market' term you're hearing so much these days.

    I contend that actually negotiating a decent price on these things is going to be bad enough. To then hand the program to a government agency and expect a profit sometime in the future, it just me, or don't government agencies have a devil of a time turning a profit in situations where the private sector would consider it a no brainer? How can we expect good results from a government agency in an uphill battle scenario?

    Now, I've got one more ugly wrinkle to throw into this scenario. Many say that housing prices need to shrink back to levels that are commensurate with their corresponding market's median income levels. Not a problem in middle America, but a significant shrinkage issue if you're in an area like Washington DC, Maryland, or most of California. In fact, it can be argued that the vast spread between incomes and housing prices in these areas helped create the final round of insanely risky mortgage products such as 40 year ammortizations, interest only, etc. Many industry experts agree that a correction is not only necessary, but will happen at some point or another despite all our artificial prop up attempts. We can take it now, or we can attempt to put it off till later with artificial market manipulations and bail outs, but it will indeed take place at some point to get back to an equilibrium.

    So, take your median income in these irrationally expensive areas and apply it to your median income in the typical mortgage scenario and viola! I'd say we're in for more price decreases yet to come.

  • Report this Comment On September 30, 2008, at 2:17 AM, urbanhardware wrote:

    If these "assets" were worth anything they would have been snapped up by private investors. There is paper from some of these banks sellingas low as .01 on the dollar and no one will touch them. Why? Becuase they are worthless poisonous loans with no value at all. the paper they are typed on is worth more.

    This is more BS from wall street. The lies are as follows

    1. We need to fix the markets so consumers can get more easy credit( Isnt that what cuased this?)

    2.) This isnt a wall street bailout. How come only connected wall street banks seem to get any benefit. (JP Morgan, Morgan Stanley, Goldman Sachs, etc)

    3.) We have to have the bailout or banks will fail (Only banks that wrote toxic loans and derivatives. So what if they fail. It is better than rewarding bad behaviour

  • Report this Comment On September 30, 2008, at 9:51 AM, BudCookson wrote:

    Interestingly enough, no one is talking about the real root cause of this problem, the changes in the FASB rules and Paulson's insistence that these securities are worth zero. This is what has pushed the balance sheets of the banks over the edge. Why not just suspend these rules, temporarily, and then phase them back in as it makes sense.

  • Report this Comment On September 30, 2008, at 11:16 AM, tjmacke wrote:


    I'm afraid your article doesn't enlighten anyone. "Myth" "Inconsistency" "Half-Truth". These conclusions you have made are not supported by facts, but instead call upon optimistic interpretations of the proposed bill--written by many of the lawmakers who got us into this mess--and prognostications of what will transpire. I don't believe any of it, any more than I believe the politicians who crafted the legislation easing post-Depression controls which now have paved our way right back to the mess of the past.

    We just don't learn from history, and we don't learn from similar mistakes in other countries (Japan, Sweden, etc.).

    Clearly something must be done, but printing money, stitching parachutes for executives, and committing dollars the government doesn't have aren't part of the solution. Good ideas are out there. The Fool insistence that any government monies committed garner an equity stake is among them (but I don't want us buying it ALL). Former Treasury Sec. Paul O'Neill has another--involving guarantees to help bring liquidity back to the MBS market. Others are out there. It is worth taking a few days to seek them out.

    Any politician who thinks this isn't the foremost issue for this election is fooling themselves.

  • Report this Comment On September 30, 2008, at 12:01 PM, ottomoney wrote:

    morgan, I would like to see what you are holding in your're portfolio of investments and how this bailout would help you. while i'm at this, let's ask for paulson's portfolio as well, see what he owns. Depending on these holdings this could be a conflict of intrest. I have not heard this point made yet.

  • Report this Comment On September 30, 2008, at 12:12 PM, stockwatcher0153 wrote:

    The notion that "foreigners" would somehow conspire to bring down the U.S. is just paranoia (as well as unrealistic). Russia, India, China and others have no more common interest(s) than the U.S. and Russia, or the U.S. and Brazil, and so on. The notion that they would all get together without working against each other as well reminds me of the title of Trent Lott's book "Herding Cats". (If the author had been more specific, say for example the Chinese government doing something about its American treasuries that would be different—having said that I don't think that's any more likely.)

    (btw "urbanhardware" I don't think it's to reestablish *consumer* credit, it's *institutional* credit (lending between businesses). Two different critters.)

    Unfortunately I think so many people are pissed at the "Wall St. fat cats" that they're calling up their Congressperson and telling them to vote against…it's like cutting off your nose to spite your face. (Btw when did someone who gets mortgage s/he can't afford become a "homeowner" whom the rest of us need to rescue???)

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

    I find it strange that the investment gurus who created this site are all for the bailout, yet the fools who have logged on and become a part of this comunity are against it. Bad loans were made to people who couldn't afford it. What is going to keep those people in their homes? Who is really losing money? Who has the most to gain from this bailout? I think that the gov't will buy the bad debt at face value, the banks will recover once the debt is off their books and they will buy them back from the gov't for pennies on the dollar. The taxpayers pay the difference and if the homeowners default, the banks aren't out anything. People still lose their homes (granted they couldn't afford it in the first place, but it's their home!) If we're going to spend my money, then let the homeowners buy back their mortgages (with a gov't backed subsidy and the help of banks who are solvent) for pennies on the dollar. Let the financiers who took the risk lose the money (isn't that why they call it a RISK?) That way the people who put us in this mess pay for it. And if it hurts the investments, then maybe we all need to show up at the next stockholders meeting and vote in some new BofDs and CEOs to run the companies we investors own.

  • Report this Comment On September 30, 2008, at 7:40 PM, nestegg4324 wrote:

    I got an idea! Instead of giving this money to the very institutions that started this mess in the first place, why not give it to the people who need it directly instead of using the banks as a middle man when they cant control the money they lend out. Why not give the money directly to the people who are applying for a mortgage or a small business loan themselves! ding ding ding that way we are guaranteed a return on our money and can give everyone a very low interest rate guaranteeing a small return that could help pay for our huge debt we owe other foreign contries like china. Only for a limited time so we dont become a bunch of communist. Could work if we do it right. and it would limit the amount of money that is spent to only what is truly needed.!!

    Comment back let me here what you think! When did the Fool become so political anyway!

  • Report this Comment On September 30, 2008, at 11:34 PM, stockwatcher0153 wrote:

    nestegg-because the problem which threatens the whole economy (unless you don't believe that's a possibility) isn't that the people who can't afford their mortgages are going to somehow take us down with them, it's that the institutions which sold the mortgages aren't able to extend credit to other *businesses* and institutions (NOT [to] individual consumers) giving the money to those homebuyers would do nothing to help non-Wall Street businesses get loans, cost the rest of us who *didn't* sign up for mortages we couldn't afford, and reward the irresponsibility of those very homebuyers for committing themselves to purchases they couldn't cover.

  • Report this Comment On October 01, 2008, at 10:03 AM, BayouStocker wrote:

    Stockwatcher, That's not how us Main-Streeters see it. We see it as a bailout of those institutions who acted irressponsibly and got into trouble. They took a risk and lost making a bad gamble. They lose and the gov't shouldn't be expected to pull them out. Market adjustments are going to happen, we have only been putting this off and the "bailout" will only put off the inevitable market adjustment (Remember Smith's Invisible Hand?) It irks me everytime I hear someone say "It doesn't matter how we got here, we've got to fix it, NOW!" I'm not for giving Paulson a blank check. I'm not for putting up $700 billion to back bad securities. I'm not for helping rich people live beyond their means at the expense of the taxpayers. Only a fool would think that the gov't would make any money on this deal. It's lose-lose for the gov't (i.e. taxpayers) and the people who made the bad loans get to write them off their books and start over. No one learns a lesson (other than the gov't can get you out of trouble) and our market is no longer a free enterprise system. We'll start over with a new bubble (maybe fast food industries?) A bailout will not resolve the underlying issues that got us in this mess in the first place. Why spend the money when it won't fix the problem?

  • Report this Comment On October 01, 2008, at 11:30 AM, Robert685 wrote:


    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's complete B.S.!!!!! it's ALL LIES!!!!!!!!!!!!!

    37% of Americans own their homes FREE AND CLEAR.

    94% of Americans Pay their Mortgates 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 7:13 PM, Robert685 wrote:


    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"

  • Report this Comment On October 02, 2008, at 4:42 AM, jester112358 wrote:

    Basic problem is that housing will continue to decrease into the future since like stocks, its still overpriced historically. Over 100 years housing prices have closely tracked inflation (yes, that's right check a graph and you'll find houses in 1890 and 1990 cost the same in constant $). So, we've got another 20-30% price deflation. So, the underlying mortgages and MBSs must have at least this discount factored into them. But, of course, the risk is enormous in these MBSs since so much BS went into them during securitization! Has the government ever made a profit in anything? Methinks not. This is a fantasy. We are wasting precious capital that should go to re-industrialization so we can become a producer, not a consumer nation dependent on debt. Financial "industry" is neither finance nor industry. Its a way for people with MBAs to avoid real work.

  • Report this Comment On October 02, 2008, at 12:58 PM, louise817 wrote:

    Anyone here alive in 1979? Remember the Chrysler bailout?

    Here's what Time Magazine said.

    "The congressional debate will resurrect all the arguments for and against giving federal aid to any company.

    "There is a strong case that such help rewards failure and penalizes success, puts a dull edge on competition, is unfair to an ailing company's competitors and their shareholders, and inexorably leads the Government deeper into private business.

    "Why should a huge company be bailed out, say critics, while thousands of smaller firms suffer bankruptcy every year?

    "Supporters of aid argue with passion that the U.S. cannot afford the failure of a company that is the nation's tenth largest manufacturer, its biggest builder of military tanks and one of only three major domestic competitors in its supremely important automotive industry ."

    Guess what.

    "Congress passed the bill 21 December 1979, but required Chrysler to obtain private financing for $1.5 billion -- the government was co-signing the note, not printing the money.. ."

    "In 1983, Chrysler paid off the loans that had been guaranteed by US taxpayers. The Treasury was also $350 million richer. "

  • Report this Comment On October 02, 2008, at 4:32 PM, brian463 wrote:

    You may want to hold off with the assumption that assets will be purchased "at a steep discount to nominal value" as the article states. This is a section from the bill the senate passed last night.

    Section 101 (e) PREVENTING UNJECT ENRICHMENT -- In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent un-ject enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. The subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.

    Anyone know any assets that fall under that last sentence! As the saying goes "fool me once shame on you; fool me twice shame on me"

  • Report this Comment On October 02, 2008, at 5:30 PM, Tinka82 wrote:

    Jester is right. I just have spent several days reading and re-studying economic theory. Although my major was in another field, I always had a passion for economic theory. (Wierd, I know. Most just read novels for fun) I've been a conservative all my life, loved Reagan, and probably one of the last standing Bush supporters....until yesterday. There is a grave error in this supply side economy theory. The wizards at the helm have basically spent the last 30 years manipulating supply and consumer purchasing power. They have bankrupted us, our government, and the global market on credit. The economy needs to take a hard turn in a different direction - back to being a producer of goods. This 'service economy' theory is nonsense. We don't build anything here and that term appears to have been a feel good measure to lull us into complacency as we lost our textiles, paper, steel, auto, electronics, and soon to be agriculture industries. It has often been said that Economists were invented to give Astrologists more credibility. I'm beginning to believe that.

    Worse yet, I've been reading over at this site This guy loves graphs more than Ross Perot, but as anyone who's studied Econ knows, that's part of the 'fun'. There are some very, very damning statistics and evidence. Consumer credit appears to have been granted in a far to loose fashion for at least 2 decades in order to keep the demand up. Supply side economics is based on cutting taxes to the producer (corporation) so that they will continue to produce. This is to keep the corporations steaming along, jobs moving, etc. Great, but what happens when the demand wanes? Answer: you create it through the invention of 'consumerism'. Build appliances that don't last 20+ years anymore, create expensive 'hard assets' that demand replacement long before they are truly worn out, create demand for jeans and tennis shoes that cost 3-4 times more than they are worth because of a designer label, encourage the middle level manager reading Forbes that he too deserves a $12,000 Cartier watch and deserves to drink $40 a bottle vodka...

    Give the consumer the 'power' to purchase these new necessities through credit. You'll make money off the credit as well, so the profits will be exponential. What a deal, eh? The sources for all the data in Grandpa Econ's graphs are straight out of the Federal Reserve, US Treasury, etc. Our leaders have had to have this data sitting in front of them, and continued to drain the global market through credit despite the grave warnings.

  • Report this Comment On October 02, 2008, at 5:37 PM, Tinka82 wrote:

    I don't mean to sound as though I'm blaming anyone but the consumer for charging and borrowing. The consumer, in the end, is responsible and no one held a gun to their heads. Just a little scary that it was so easy and so encouraged. Our economy wouldn't have flourished without the 'spending drones' (consumers) succumbing.

  • Report this Comment On October 02, 2008, at 10:33 PM, mlmason wrote:

    The politians are at it again. They are going to steal money from the american people and give it to the same type of people that got us in this trouble all the while allowing the felons to hide behind the coattails of certain politians as advisors rather than be in jail. Now if only they handle things right the american people will make a profit. How in the world can anyone believe this. This is stupid. I don't have the patience for this. And as for what Brettze wrote about "paying union workers" If you enjoy a 40hr work week, benefits, child labor laws, safety at work, ect... thank a union member. It did'nt come free either.

  • Report this Comment On October 03, 2008, at 11:49 AM, jerry39orso wrote:

    Very good explanation Morgan. It is too bad that a lot of our congressman do not understand what is going on. I sent a letter to my congressman calling him completely financially illiterate!

  • Report this Comment On October 03, 2008, at 3:26 PM, archierouge wrote:

    The following excerpt from the link Schwarzenegger asks Treasury for $7B loan, proves how RIGHT Mr. Houser is in his analysis of the "bailout." Need I say more?:)

    Lockyer said that unless the national economic crisis subsides and California can secure private short-term loans "the State's cash reserves would be exhausted near the end of October.

    "Payments for teachers' salaries, nursing homes, law enforcement and every other State-funded service would stop or be significantly delayed," Lockyer said. "And California's 5,000 cities, counties, school districts and special districts would face the same fate."

    The Federal bailout, which passed the Senate Wednesday night, would permit the Treasury to buy up $700 billion of bad assets - most of which are backed by mortgages - from banks in an effort to clean up their balance sheets so that they can resume lending.

  • Report this Comment On October 03, 2008, at 3:39 PM, yattaboy wrote:

    I agree with the article and try to tell my acquaintances 'til I'm blue in the face the same things. There's a reason this message isn't getting out. President's are supposed to explain these things, but from Bush's speechwriters, we get the same monologue 'We have to undertake this program to protect America.". What does that mean? What does Pelosi, completely across the aisle say? Same thing, slightly different words. Paulson? Paulson says nothing. Imagine how a JFK or FDR would speak to the country...and world...about this type of crisis. The spin doctors are using Entertainment Tonight production values to explain mortgage back securities and their impact to the economy, and we wonder why everyone thinks that "Wall Street", whoever that term actually applies to, is about to get a cash gift of $700 billion smackers. Frankly, I think we need a Depression. It might finally teach the general population how the economy does...and doesn'

  • Report this Comment On October 03, 2008, at 3:54 PM, MikeW92103 wrote:

    I'm confident that Wall Street can find plenty of absolutely worthless assets to sell us for $700B.

  • Report this Comment On October 04, 2008, at 11:05 PM, swenman wrote:

    The 700 billion bailout is the greatest hoax perpertrated on the American people ever. The theory that the government will handle this so that they recover anypart of the $700,000 billion is

    a pipedream. Show us anytime the Government handled money well. The government will spend another $300 million justtrying to figure out how to spend the money. the $700 Billion is GONE, GONE. GONE.

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