$700 billion bailout - confused what is happening

Wonder how much public sentiment is playing into this. Most of the public thinks this is a bad deal and I'm sure they are letting their representatives and senators know this. I'm so glad most of America suddenly feels like playing economist. In the words of Jim Cramer, "They know nothing."

Maybe if Bernanke or Paulson shed a tear on national television they will finally get the point across.

The average Joe Schmoe doesn't understand the ramifications of bank failures and doesn't feel as though Wall St. affects him personally. The way he sees it, his tax dollars are going towards saving the ass of some multi-million dollar net-worthed bankers who f*cked up the system. If I had 95 IQ, I would probably be pissed off too.

The problem is that Bernanke and Paulsen have not effectively communicated the plan to the general uninformed American public. Paulsen has focused only on Wall Street and has failed to accurately describe the ramifications for Main Street should we let certain Wall Street banks fail and not take control of these toxic assets. If he came out and simply said hey, if you want to ever get a mortgage, a student loan, a car loan and you want to prevent 20-30% unemployment and a massive depression you should support this bill. As a fiscal conservative I understand why some republicans do not want to burden tax payers with a potential liability down the road but we need to focus on big picture and survival. The crisis of confidence continues to drag on otherwise healthy institutions, one need only look at 3 months and the LIBOR spike to see that fear is driving action as banks hoard cash and lending tightens further.

If Bush, Cheney, Paulson, and Bernanke personally finance this package, and make sure that all the CEOs of any bank that receives so much as a cent from this package is fired unconditionally without severance, and is forced to reimburse their former employer all bonuses paid since 2005 (or go to prison), I might support it. The CEO ran the bank into the ground, and therefore the bank is insolvent, threfore it needs bailout money. If the bank can afford to pay its CEO $20 million to leave, the bank is NOT insolvent, and does NOT need bailout money. It's as simple as that.

As far as toxic debt goes, nobody put a gun to the banks' heads and told them to write bad debt. They did that all on their own. And as far as a depression goes, other banks will come to replace them. And if half a bank's portfolio consists of these toxic mortgages (or enough to lead them to be insolvent), they're NOT healthy institutions and they SHOULD fail.

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

the government has the stability to hold the subprime-linked securities and eventually earn a healthy return. ultimately, that is to the benefit of taxpayers. the government can borrow in good-faith (for how long, who can say?), whereas investment banks depend on whatever securities they hold to serve as collateral to provide intermittant financing. if the securities are, at the moment, fetching zero market value, banks fail because they can't generate cash.

it is in the immediate and future interests of all involved parties: the government, banks, and taxpayers, that this deal go through. People who make asinine comments about this being corporate welfare, or that the government should be giving $700bn to middle class families (Katie Couric...) don't know shit.

I totally agree with yesman's comments. This shouldn't be as political as it is painted in the media to be. It's not about bailing out Wall St. as much as it is stabilizing the American economy. Here's a good article summing up the situation written by the CEO of Bank of America:

http://online.wsj.com/article/SB122238687448377065.html

this is a fkg hostage negotiation - the financial markets are holding a cocked gun to credit worthy businesses and consumers and phoning in to paulson and bernanke that if they dont help liquidate its mortgage positions, they are going to murder the economy. somebody tell samuel l jackson and kevin spacey they are needed at the white house.

Holymonkey,

Your comments sound like that of a college student...Your placing blame entirely on banks is overly simplisitic and does not acknowledge the government's role (Fannie/Freddie) in pushing home ownership on all Americans (no matter how uncredit worthy they may be), predatory practices, and exuberance on behalf of consumers. The writing was on the wall but no one likes to end a good party.

CEOs and shareholders are being punished so I dont know what you are ranting about. People do need to be held accountable and a post mortem is absolutely necessary.

Why should Bush, Cheney, Paulson, and Bernanke personally finance the bailout? I can appreciate your textbook understanding of free market capitalism and agree that many of the governments recent moves are borderline socialism but something must be done to stabilize the markets and create a sense of confidence.

holymonkey is a college student undoubtedly, has no idea how sectors of economy are related and how a failed banking system will trigger a depression. go back to studying for the LSATs because you don't know shit about economics 101

"There is only one bottom line -- how much money you make."

'capitalze those banks w/ minimal mortgage debt exposure' - which banks are you refering too? you pointed out how huge the mortgage market is - everyone has a stake.

i think it's become pretty clear that Goldman and MS will be acquiring (or be acquired by...) commercial banks. this will allow for more stable financing and impose tighter restrictions (esp on leverage). By helping banks clear up their balance sheets, we are using the money to better capitalize them.

this is not so much about pumping liquidity into the system (we've tried that), as it is about removing the drains on liquidity.....and establishing a framework that requires less liquidity.

WaMu going to JPM, WB maybe going to Citi...who's left on the radar for MS or GS?

Paulson has said that there are a few main objectives to the plan. First, to reduce systemic risk by removing 'toxic' assets which are causing uncertainty. Second, to foster credit growth, especially in the mortgage markets. Third, to aide homeowners by purchasing loans and modifying them to keep people in homes.

As for the comment that $700B is just a drop in the bucket, remember that this is essentially a $700B revolving line, so once the assets are purchased and resold, then the government could go out and continue to buy. They can essentially buy as many assets as they want over the next two years, assuming they can replenish that original facility.

Also, the notional value of the assets that can be purchased could be well over a trillion dollars. These assets are marked way down below par so the government can put a lot of money to work above the $700B limit.

As far as I know this crisis isn't going to go away unless fundamental changes to the economy are made. E.g. end our addiction to debt and the military industrial complex. As far as mortgage fraud goes, a simple "may I see your tax returns" would have been more than enough to catch 99% of it. And when you loan someone who makes $60k a year $900k, do you seriously expect them to be able to make payments on that? the payment would have been, at 5%, about $5,500 a month. That's more than the person's gross income.

When banks try to gouge you for every dollar you have, write exotic scam-like mortgages, inflate appraisals on purpose to make bigger and bigger loans to people who can't afford them, and should have seen the real estate bubble from a mile away and chose not to, it's very hard to have any sympathy whatsoever for them. Plus bailouts just create a moral hazard.

Let me say for the record that I have no sympathy for people who bought homes KNOWING they can't afford one. Just because the bank says you're qualified for a $800k mortgage doesn't mean you have to take one. Nobody put a gun to their head and told them to sign on the dotted line. The government can push home ownership all it wants but I'll tell them to shove it where the sun doesn't shine until I can reasonably afford one. And no, if you can't afford at least 20% down and payments on a 30 year fixed rate mortgage without having to live on cat food, you CAN'T afford one.

Oh, and let me add that while taxpayers are on the hook for banks' losses, they don't get a fat check in April when banks post a profit. Call me crazy, but some of you talk like someone forced them to write bad mortgages. They were more than free to refuse subprime applicants. Someone making $60k a year should NOT be able to buy a $900k McMansion in a "transitional neighborhood", short of having a $600k down payment, because the maximum they can reasonable afford is $2k a month. Maybe.

You tell ME, you live on $60k a year: can YOU afford a $5,500/month mortgage payment?

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

it was off the cuff, but i stand by "banks w/ minimal mortgage debt exposure". let me clarify maybe. i know just about everyone has a stake. but this stake can be measured and cannot all be equal. so im talking relatively. this is akin to finding a way to support the healthier banks (the better/luckier risk managers) [eg JP] and allowing dissolution of the over extended (hopefully orderly) [eg WM]. the hole, i think would be if the current plan already addresses this in some way. im not sure.

i disagree that "its not...liquidity" and using "drains on/less liquidity" doesnt really help your point. but thats probably getting too technical. i think i see what you mean. to clarify my point, i dont mean liquidity in the traditional monetary sense (fed ops) but in our new financial world sense as a lubricant to the credit crunch.

i agree with the revolving line point. i was not considering that. you have to consider this though. the revolving line has a limit. correct me if im wrong, but say the government purchases $700B immediately, they cannot purchase anything else until those assets are disposed of (paid off, resold, etc). i think everyone agrees that wont be achieved quickly (think snl recoup), so in some very real sense that credit limit is a hard and fast one. of course as you mention, they can always ask congress for more, but we see the negotiation difficulties and the populist opposition to that. though if it appears to be working that could change considerably.

i really like your point about the notional value. im not sure how they calculate the $11T outstanding mortgage debt number. at say 50c on the dollar its still large but $700B efforts seem considerably more potent.

I really don't see how any financial institution can have 'minimal' exposure. even the smallest banks depend largely on the securitization of their mortgage receivables to generate liquidity and earn their spread again and again.

what I meant to imply by the 'drains' comment was that no matter how much cash is pumped into credit markets, as long as subprime assets continue to eat it up, its effect will be negligible. It's like trying to fill up a bath-tub with an open drain (assume the drain-rate is faster than the pour).

holymonkey - even for a college student, your blanket ranting is naive and inane. Do you not understand how a major bank failing carries over into the rest of the economy? The nation needs to delever and moral hazard is an unfortunate externality, but what we're trying to say is that it doesn't outweigh major banks failing.

what is your fixation with putting guns to heads? try to be a bit sensitive - I do, in fact, know people who signed excessive mortgages 'persuaded' by a .44 magnum put to their temple. And sadly, I know the bankers who underwrote those loans and accepted them as collateral, with 12-gauge shotguns primed at their crania. You have no idea how this all came to pass

my favorite holymonkey comment was that "banks fail and news ones pop up" acting like the markets are totally efficient. it can take a long time to recover from a bad event like the one currently going on with major banks dropping like flies. literally, i cant see the banking industry returning to its past glory for at least a decade. im no greenspan here (or is he not worshipped as a demi-god because of this crisis anymore?) but when shit gets this bad it will take a while to rebound, and if you dont realize this holymonkey you are an absolute idiot

"There is only one bottom line -- how much money you make."

We got through the Great Depression, we'll get through this crisis. But it's not helped by propping up an inefficient system. They're just delaying the inevitable total crash that's going to come. And later it'll be a thousand times worse.

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

What happens when the banks sell the government the worst of their mortgage backed securities, holding the better ones until the market becomes liquid again? This will mean the taxpayers gets lumped with all the securities everyone is worried about, probably overpays for them while the banks get a virtual hand-out.

Classic Akerlof's lemon problem.

There should be some sort of all or nothing clause.

The reason why this bill is struggling to get through is becuase the average american and many politicians have no clue how the program and the credit markets work.

CKnew - the government will set up a reverse auction for a specific type of collateral. They will take the lowest price out of the market and hold for gains in the market. Although deliquency rates on mortgages have increased exponentially, the prices in the market are priced way off their fundaemntal value. The government is going to make a killing off these programs. The prices keep dropping on B & C (subprime) RMBS because there is no secondary liquidity. Once secondary liquidity returns, the prices will rebound (and the government will make a profit).

The Fed/Treasury have literally become the best investment bank on the street. They have the ability to create deals and fund them in ways that are unmatched.

On the M&A League Table: JPM/BSC, BAC/MER, JPM/WM

On the Debt League Table: AIG: 85bn credit line at LIBOR+850 & add-on GSE Liquidity Facilities... Bills are trading at balance sheet, most loaned out at 2.25% or higher and bills are trading

We got through the Great Depression, we'll get through this crisis.

Thanks largely to a huge war that weakened Europe and strengthened us. Also, the "we'll get through this" mentality is typical of American cheerleaders who don't understand the nature of our hegemony.

It's okay... with idiot bush in office, there's a new war to boost the current economy... and with idiot mccain possibly taking the reigns, who knows how hard the war can escalate.

WWIII FTW!

eric809e - great insight, I admire your understanding of this all. sort of makes you realize why this is the perfect environment for paulson as the sec treas....

Really, it's such a good idea to only read posts by people with stars. I should have started doing it long ago. While some people without stars make appropriate comments (good point there, JuwannaMan, although you could have expanded the last part), others...do not.

And before someone points out that I don't have a star...I am not posting an opinion. I am not informed enough. I am just informed enough to recognize plain and obvious bulls**t.

My two cents: Sure, there is certainly a huge disconnect between the average American taxpayer and the Fed/Treasury officials that are "in tune" with the market, but I don't see how this bill could ever have been sold to the public as it was written. There has been a lot of talk about the huge windfall profits the government may make if they acquire and hold these MBS, CDO's, etc. until maturity. According to what was written in the version of the house's bailout bill that was voted down today, however, those profits would be handed over to Paulson along with full discretion as to their use(s). There is no clause stating that it will go towards paying down the national debt, any sort of direct benefit back to taxpayers, or the like. How do you plan on selling a bill to the public where the sole beneficiary is going to be a former GS CEO? This is how the general public looks at it. I agree that something needs to be done ASAP, but let's try to get creative here.