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The Latest on the $700B Bailout

Posted on Sep 23, 2008 by Mike Geyer

Many questions have emerged since President Bush’s proposal to bail out AIG. One of the questions is what will the price tag be to you, the taxpayer? Here’s what we know so far. The Federal government would buy up as much as $700 billion of illiquid assets at a deep discount from banks. The Treasury Department would run the program directly. What remains to be seen is how the Treasury Dept. will structure the purchases and what price they’ll pay. One method that the Treasury has suggested is a reverse auction to set the discount at which the assets would be picked up. Private money managers would oversee the assets while they are in the government’s possession. While the proposal calls for this purchase of $700 billion of bad loans, it’s unknown what taxpayers would ultimately pay for this bailout. Treasury Secretary Paulson said the illiquid mortgage assets will be held by the Treasury and they will be resold at some time ideally at a gain. He said it’s possible that Americans won’t end up on the hook. The government could make a substantail profit but no one really knows. Experts are cautiously optimistic the plan will help the housing market and therefore the economy to recover. Skeptics worry however that many banks may be turned off by the haircut they’ll have to take. If these assets are bought at a deep discount, the banks could have to take huge writedowns which may hurt their operations and ability to raise capital. Also, some experts think that the bailout won’t automatically make banks profitable nor will it stop the slide in home values that is having such a negative impact on the economy. The Treasury Secretary disagrees and says that this plan will help the economy directly. Congress is now reviewing the plan. Some congressmen say you have to deal with the issue of foreclosure or this problem will continue. Others say handing over a $700 billion blank check to Wall Street isn’t the full solution to the problem. They say we need to find a solution for the protection of the homeowner as well.