This shouldn't be called a "bailout", and we should stop saying "it's going to cost $700 billion". The goal of the bill, and most likely the result, is not to bail out the banks and other companies that made stupid loans, but to prevent their problems from becoming everybody's problems. Even if their toxic debt is purchased by the government, they will still have issues of capitalization to deal with (and so far, in the cases where the govt has moved to shut down or rescue Bear Stears, Lehman, AIG, and WaMu, none of those companies got "bailed out", they pretty much got a hatchet).

The treasury would be authorized to use up to $700B (in stages, after demonstrating they're not giving away the store) to temporarily acquire the bad loans, at a significant discount (what the actual discount is will be key to the cost of the program). The only way it will cost $700B is if all of those mortgages prove to be worthless, i.e., all of the houses are worth nothing. For that to happen, the whole country would have to be pretty worthless. In a stabilized economy, those houses and their associated mortgages may be worth 50-60% of face value, so if the govt can buy them for 40-45%, the taxpayer will do well. If the govt pays 50-60%, the taxpayer will break even, but reap the benefit of not having a collapsed economy. If they pay more than that, they're either corrupt or idiots (or both), but as I mentioned above, it's not likely they would do that, they seem to realize it's a buyer's market. But even if the govt overpays by 10%, the cost is "only" $70B, way more than it should be for sure, but better than seeing what happens when not just banks fail, but pension and retirement funds go broke, towns default on bonds, and we have 25% unemployment.

As far as the public deserving this mess, well, you all elected this government. They (the politicians who are supposed to provide oversight) were either sleeping on the job or in cahoots with the ones who ran amok, but you could have voted them out. You should have had an idea of their incompetence back in 2004, when it became apparent that they were borrowing hundreds of billions of $$ to finance an unnecessary invasion and occupation that bought us no peace or security.

You are also the ones who took out loans you couldn't afford, or borrowed against your homes so you could buy more stuff. You didn't have to do that. Yeah, I know, you were told housing prices could only go up, and they didn't. Guess what, adults, they lied again.

Ok, sorry for going off-topic and spreading the blame, I just don't want to hear any more about the greedy banks. There was plenty of greed and short-sightedness to go around. The issue now (in addition to deciding who will be best suited to lead the country out of this mess for the next four years) is how to stop the hemorrhaging. We can do nothing because we're pissed off about being stabbed by some drug dealer (that would be the banks), or we can try to do something to stop the loss of blood.

You've got to ask yourself one question, punks: do you feel lucky?

The bundled mortgages were rated. That means the holders have some idea of the likelihood of default. Do you think they would choose to sell their best assets or their worst?

And the mortgages themselves are only a piece of the problem. What about all that supposed risk insurance companies were selling each other, with the idea that the insuror would pay if the holder of the mortgage did not? Because companies could issue such insurance to anyone, a lot of such paper was issued. And companies involved are so leveraged they likely never could pay losses.

I don't know enough about the plan or the problem it was designed to meet to believe it would work. And those with more information and the ability to make a considered evaluation have not been prominent.

Isn't it be appropriate to have such concerns addressed before advocating passage of this legislation?

I believe the mortgages were bundled together in varying degrees of quality - so that most packages had a range of different risks. If they were able to unbundle them easily, they would have already done it, that's what has kept banks from renegotiating the terms with many of the borrowers - they're all part of some big bond.

Yes, the risk insurance is a part of the problem, but if the govt buys the bonds and injects both capital and stability into the market, the hope is home prices will stop cratering and foreclosures will also stop increasing and the insurance won't be accessed. if the loans default, the bonds tied to them default, and the insurers default, and the people who bought the bonds end up with nothing, so many of them go broke or default.

I would rather a different plan, one where the government provides temporary capital (9 months) to banks that are in danger of collapse, and they have 9 months to get their affairs in order. They can sell bad loans for cheap, raise additional capital, or get acquired. The govt would be a preferred senior shareholder and would in most cases get all of the mony back. The shareholders of the lender would be the ones who lose, as they should be, but there would be no defaults on loans or insurance claims.

I don't see that happening, nor do I see any other plan coming forward. The proposal put forth by the house republicans is absolutely insane - they want to sell insurance to banks that will default (resulting in claims against that insurance, which the govt would cover), and then "pay" for those losses with tax cuts and the elimination of the capital gains tax. They are smoking crack.

The treasury plan as modified is far from perfect, but we are talking about congress and the bush administration, so we should not have high expectations for a well-designed plan. Marginal is probably the best we can do, with all of the politicians involved.

My understanding is that the borrowers' main problem is the sudden change in the amount of the mortgage payment due every month. Low initial payments expire, and the higher payments are not affordable by many of those who had been current.

That's why Democrats and others have been arguing for negotiation as part of bankruptcy. A rewritten mortgage could have an achieveable monthly payment.

I suspect, by the way, that to the extent people questioned what would happen when the higher rates began, they were told they could refinance or sell their houses based on increasing prices.

So I am not certain why you think aiding banks would aid those billed for mortgages beyond their ability to pay. As you wrote:

Yes, the risk insurance is a part of the problem, but if the govt buys the bonds and injects both capital and stability into the market, the hope is home prices will stop cratering and foreclosures will also stop increasing and the insurance won't be accessed.

[End quote]

Will the holder of the mortgages, government or other, lower the payments? I haven't seen that in reports about the legislation.

Insurance fees, I've read, varied with the rating of the bundled mortgages. That would indicate a degree of consistency in the bundles.

And I believe the total value of the risk insurance paper is somewhere in the $ trillions.

We live in interesting times.

Philidor,

To your first point, it is correct, and the Democrats have been arguing for negotiation as part of bankruptcy. But if the mortgage owner has half of a brain, they wouldn't want to foreclose and force bankruptcy, it just puts another home on the market, putting more downard pressure on prices. The bank should re-negotiate the loan before it gets to bankruptcy.

If the government buys the mortgages, they can unbundle them and re-sell the mortgages to someone who will hopefully re-negotiate them. I don't see this as a way to aid the banks, only to buy time so they can be appropriately re-valued. The re-valuation will happen in one of two ways: either they go bust, and take people down with them, or (like AIG), they get time to write up their last will and testament, sell off valuable assets, and liquidate themselves.

Interesting times? A little too interesting for me.

Mortgages are an asset to the banks. One subject to devaluation, as when Merrill Lynch sold off a substantial part of its collection for $0.22 on the dollar. But if those assets are too devalued, then the banks officially don't have sufficient reserve capital. I suspect that's why they haven't agreed to formal devaluation by rewriting the mortgages now.

Apparently, the federal government would supply the money to make the mortgages sufficiently valuable for the banks' balance sheets. But if the devaluation is formalized now, before prices recover, then the government has accepted the loss. Whether they would do so I don't know.

Your scenario of the banks admitting they've failed and obtaining as much as possible for their assets is reasonable. Except that the number of buyers is diminishing. How many companies can JP Morgan Chase and Citi absorb?

Still, companies willing to accept valuable assets separately can probably be found. But that leaves the under-water assets to be devalued, perhaps in bankruptcy, and what happens when there's an attempt to collect on the risk insurance?

I think that any plan passed must be described sufficiently well to assure the public that it has a chance to work.

May you live in interesting times is reputed to be a Chinese curse.

I think JP Morgan and Citi (and BofA and Goldman) can absorb lots more, as their valuations drop to next to nothing, although I am beginning to believe there is just too much debt out there for the economy to support.

As far as describing a plan sufficiently to the public, that would be impossible. A large portion of the public believed that Iraq attacked the US. They just don't have the attention span for a problem as complicated as this one.

It does sound like a curse, the bush curse. It's Rove's Revenge, you know. He was so mad at Bush sr for firing him from his last campaign, that he got back at him by getting his useless, drug addict, alcoholic failure of a son elected president. When that didn't work, he had him appointed, and the rest is history.