Frequently Asked Questions about the Wall Street Bailout

What is the Wall Street Bailout?

The Bush Administration has proposed that $700 Billion be used to buy Mortgage Backed Securities (mBSs)

Why did they propose the Bailout?

Wall Street institutions need the bailout because no one wants to buy the mBSs.

Why does no one want to buy the mBSs?

Because they are complex financial instruments that are very difficult to understand.

How difficult?

Very Difficult.  In fact, they are so difficult to understand, that only the creator of the individual MBSs can understand it.

I still don't understand.  Why did they propose the bailout, again?

Because the the institutions are highly leveraged, and if a mBS goes down in value, the institutions could be forced to writeoff the loss.

So what?

Because they borrowed roughly 40 dollars for every dollar of capital they had, and because they used the $40 to create these mBSs, if a mBS goes down in value by just a few percent, then the firm could become technically or actually insolvent.

Again, So what?

If the firms become insolvent, then dozens, or perhaps even a hundred CEO's could lose their jobs.

Why did the Bush Administration say that the Bailout is needed?

Because some of these firms provide credit to companies making real products.  This credit is the axle grease that keeps the economy going.

How did they arrive at $700 Billion?

They just picked a large number to convince the market that they are serious about this alleged problem.

Has the Administration explained what might happen if the bailout doesn't occur?

They have explained that they can't explain. If they told us for example, that a specific bank was in trouble, there might be a run on that bank.

Do you mean my bank might be in trouble?

Most likely no.  The FDIC insures individual accounts, so even if your bank was in trouble, the FDIC would take care of the problem.

Are they only helping the companies that need it?

No.  Paulson made it clear that needed all companies to participate so he will buy the mBSs from all companies in an attempt to unfreeze the market for the mBSs.

I'm still not sure what an mBS is.

mBSs are made up of toxic bonds, credit swaps, collateralized Mortgage Obligations, and Smelly River Ordinaries. 

Didn't these companies create the mess they are in?

Yes.

So the CEO's whose jobs we're trying to save were also at fault?

Yes.

How will the government price the mBSs if no one is buying or selling them?

They will trust the sophisticated computer models that the sellers created.

Trust the seller's computer model?!  Couldn't they use an auction or use eBay to figure out the right price?

No.  Because these financial instruments are so complex, they can only be valued by a computer Model.  Silly person, if you put these instruments on eBay, buyers would only pay a few cents for each one.  Less if shipping was involved.

But the government will check the computer model?

Yes.  They indicated they will verify that there is actually a computer sitting there.

What should Main Street think about this?

Main Street should be happy that they've allowed dozens, perhaps hundreds of CEO's to live the American Dream.

Why are the Democrats going along with the Wall Street Bailout?

They figure that the voters will blame the problem on the Bush administration and it will provide a sample for the Democrats when their administration takes over in January.  Lots of the $700 Billion will still be left, and then the Democrats can give it to the firms that give them the most money for campaigning.  Plus, they automatically roll over whenever Bush wants something.

What will the Bush Administration do next?

They will be proposing a $750 Billion bailout of Oil and Natural Gas companies.  After all, Big Oil provide the axle grease that keeps the economy going.

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