Heck, What's $700 Billion Between Friends?

Advertisement

It’s the 700 billion-ton elephant in the room when it comes to ideas. The Wall Street bailout package. $700 billion dollars in the hands of the Treasury Secretary to dole out as he deems fit, in an attempt to dig Wall Street investors out of this tanking situation.

But is the bailout a good idea or a bad idea?

Okay, here's the rundown that the Associated Press has developed for today, as far as the package and where it stands now. The plan, currently, will give $700 billion dollars to the Department of the Treasury, earmarked to purchase "troubled assets" and purchase stakes in troubled financial firms.

The Treasury Department will also be tasked with setting rules prohibiting excessive executive compensation for those companies who take part. An oversight board will be developed with a special investigator tasked to monitor it, Uncle Sam will have to renegotiate the mortgages it purchases, and the $700 billion will be made available in phases.

So what's the verdict? Bad Idea

Yes. Although, frankly, it's hard to be as sure about this one as I am on other topics we've taken on here. Mostly because this is such a humongous debacle, with banks failing left and right both here and abroad, that there's no telling what the best course of action is.

This has more than anything to do with the fact that the current freeze on these so-called "Collateralized Debt Obligations," these packaged mortgage investments that are falling through the floor, has prevented banks from revealing, and the Treasury from learning, what these troubled assets are worth.

The Wall Street Journal reports that the banks and Uncle Sam are in a bit of a circular situation. The banks won't know what these CDOs are worth until the Treasury offers a buy price, and the Treasury can't offer a buy price, really, until they figure out what these things are worth.

And things are continuing to get worse. The Wall Street Journal says this is now, officially, the biggest bank failure in American history. I know the Savings & Loan failure in the late 80s saw thousands of financial institutions go under, but those were little banks.

These are the giants falling over.

And with each one that hits the ground, a shock wave rattles the rest of the financial industry.

Lehman Brothers, Morgan Stanley, Bear Stearns, AIG Insurance, and now Washington Mutual was just purchased by JP Morgan Chase yesterday. And, even with these banks getting purchased or bailed, now the buyers are already starting to hurt.

Citigroup hasn't purchased any failures yet, but they're hurting.

Chase, who just bought WaMu is hurting. Barclays in England, who bought Lehman Brothers, needs a bailout of their own.

Lloyds Bank just bought Britain's largest mortgage lender HBOS.

And it could continue.

However, if the bailout as it is is a bad idea, what's a better idea? Well, former Clinton Administration economic advisor Robert Shapiro made a suggestion that needs more coverage.

Instead of bailing out the banks, bail out the homeowners. This ship isn't going to right itself until the falling housing market stabilizes. Falling home prices are why these mortgages are now worthless, after all.

And reducing foreclosures by helping homeowners keep current will not only help Wall Street, but it will help Main Street, and all the smaller, hurting banks on it that have been caught in the crossfire, and won't benefit from the Wall Street bailout as it is.

If fewer homes fall into foreclosure because people can return to making on-time payments on them, these banks will see the value of their investments rise, and the housing industry will see home prices stabilize, which further means Wall Street will see the security values of their investments stabilize.

These investment banks, after all, are the owners of all these homes with falling prices.

Congress needs to hash this one out, since I think it seems the most promising.

Print this story