The Wall Street Bailout Plan, Explained By DAVID STOUT
Published: September 20, 2008
WASHINGTON News reports about the upheaval
in the world of finance have been full of esoteric terms like
mortgage-backed securities and credit-default
swaps, but the crisis has resonated for people who know
little about Wall Street and who did not think they would
ever have to know. Here are several questions and answers
of concern to Main Street Americans:
Q. The bailout program being negotiated by the Bush administration
and Congressional leaders calls for the government to spend
up to $700 billion to buy distressed mortgages. How did the
politicians come up with that number, and could it go higher?
A. The recovery package cannot go higher than $700
billion without additional legislation. As for that figure,
it lies between the optimistic estimate of $500 billion and
the pessimistic guess of $1 trillion about the cost of fixing
the financial mess. But the $700 billion is in addition to
an $85 billion agreement on a bailout of the insurance giant
American International Group, plus $29 billion in support
that the government pledged in the marriage of Bear Stearns
and JPMorgan Chase. On top of all that, the Congressional
Budget Office says the federal bailout of the mortgage finance
companies Fannie Mae and Freddie Mac could cost $25 billion.
Q. Who, really, is going to come up with the $700 billion?
A. American taxpayers will come up with the money,
although if you are bullish on America in the long run, there
is reason to hope that the tab will be less than $700 billion.
After the Treasury buys up those troubled mortgages, it will
try to resell them to investors. The Treasurys involvement
in the crisis and the speed with which Congress is responding
could generate long-range optimism and raise the value of
those mortgages, although it is impossible to say by how much.
So it would not be correct to think of the federal government
as simply writing a check for $700 billion. It is just committing
itself to spend that much, if necessary. But the bottom line
is, yes, this bailout could cost American taxpayers a lot
Q. So is it fair to say that Americans who are neither
rich nor reckless are being asked to rescue people who are?
What is in this package for responsible homeowners of modest
means who might be forced out of their homes, perhaps for
reasons beyond their control?
A. Yes, you could argue that people who cannot tell
soybean futures from puts, calls and options are being asked
to clean up the costly mess left by Wall Street. To make the
bailout palatable to the public, it is being described as
far better than inaction, which administration officials and
members of Congress say could imperil the retirement savings
and other investments of Americans who are anything but rich.
But it is a good bet that the negotiations between the administration
and Capitol Hill will include ideas about ways to help middle-class
homeowners avoid foreclosure and perhaps some limits on pay
for executives. And it should be noted that neither party
is solely responsible for whatever neglect led the country
to the brink of disaster.
Q. How is it that the administration and Congress, which
have not tried to find huge amounts of money to, say, improve
the nations health insurance system or repair bridges
and tunnels, can now be ready to come up with $700 billion
to rescue the financial system? And is it realistic to think
that the parties can reach agreement and get legislation passed
in a hurry?
A. The first question will surely come up again, involving
as it does not just issues of spending policy but also more
profound questions about national aspirations. As for rescuing
the financial system, elected officials in both parties became
convinced that, while a couple of venerable investment banks
could fade into oblivion or be absorbed by mergers, the entire
financial system could not be allowed to collapse.
And, yes, the parties are likely to reach an accord. Many
members of Congress are eager to leave Washington to go home
and campaign for the November elections, and no one wants
to face the voters without having done something to protect
modest savings portfolios as well as giant investors.
Stephen Labaton and David M. Herszenhorn contributed reporting.