Everything You Want to Know About the $700 Billion Plan
By Anand Chokkavelu and Brian Richards October 2, 2008
In case you just woke up from hibernation (welcome back, by the way), here's a quick recap of the events that have crippled our financial and credit markets and forced the government's hand ... all in the last month:
Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and AIG (NYSE: AIG) were all bailed out by the government, while Lehman Brothers was left to fail. Just three weeks ago, we called these events the biggest financial story of the past 50 years
Washington Mutual (NYSE: WM) was seized in the largest U.S. bank failure ever and handed over to JPMorgan (NYSE: JPM).
The government agreed to backstop Wachovia's (NYSE: WB) loan portfolio to speed a sale to Citigroup (NYSE: C). A few days later, Wells Fargo trumped Citi's offer and required no government backstop.
The stock market was sent into hyper-reactive mode, spurring ridiculous day-to-day volatility. The VIX, or Volatility Index, hit its highest level ever.
We both cried. On more than one occasion.
The financial markets have been especially volatile this past week, as market participants wondered if U.S. government legislation would come in to shore up the credit markets. The plan, led by Treasury Secretary Henry Paulson, asks for -- cue Dr. Evil impression now -- $700 billion to buy the more toxic assets from the Wall Street balance sheets.
The $700 billion bailout plan is by no means an act of charity; this money will be invested, not spent. These assets would not be value-less (in fact, it's possible the government makes a profit), but it could take years to unlock their worth for the American taxpayer.
The ramifications of not passing this legislation are serious. Credit markets will freeze, businesses will take a hit, and, most of all, consumers will be pinched.
Problem is, the ramifications of passing it are serious, too. (Rock, meet hard place.) There was a loud uproar this week from Main Street over this legislation: about the piling on to our national debt, about further devaluing the dollar, about increased governmental intervention in the private sector.
Even we Fools disagree vehemently on which is the right course of action. Heck, we can't even agree on whether it should be called a bailout, a rescue plan, or a stabilization necessity.
To help you figure it out for yourself, we've put together our best thoughts from both perspectives. Read below and educate yourself, Fool!
Understanding the Bailout
Morgan Housel: "What Part of the Bailout Plan Did You Miss? " (Sept. 30)
Morgan Housel: "National Debt: The Race Toward $10 Trillion " (Sept. 30)
David Forrest and Bill Mann: "Fool Blog: No Depression? Really? " (Sept. 30)
David Lee Smith: "Some Tough Questions on the Bailout " (Sept. 23)
The "For" Argument
Morgan Housel: "Market Meltdown: What Happens From Here " (Sept. 30)
Anders Bylund: "How to Be Finnished With This Crisis " (Sept. 30)
Morgan Housel: "The Bailout: Myths, Half-Truths, and Inconsistencies " (Sept. 29)
Scott Schedler: "How We Can Fix a Crisis We Did Not Create " (Sept. 26)
The "Against" Argument
Alyce Lomax: "Fool Blog: 6 Thoughts on the Bailout Buzz " (Sept. 30)
Alyce Lomax: "Bailout: The Sucker Punch " (Sept. 25)
Chuck Saletta: "What This Bailout Means to You " (Sept. 22)
Alyce Lomax: "Fool Blog: Paulson's Mother of All Boondoggles " (Sept. 22)
Just in case you're like me and getting more and more confused by the minute with all the information, pro and con, about the bailout, or whatever it's being called today, here is an article I received from the Motley Fools. More information that might just serve to confuse even more, or maybe something that might just explain the whole mess to you.
I still don't like the idea of bailing out any company whose management chose to make risky moves. I think any company, large or small, has to be able to make it on their own without taxpayer intervention. And this is what this is: taxpayer intervention. Sometimes it's time for the market to shake some of the detritus out.
I'm not cold-hearted, and against helping my fellow man. If a company's management makes too many bad decisions, maybe it's time for them to look for another line of work. This bailout smacks of someone wanting everyone to be winners and not have any losers. It's not a game where everyone plays and no score is kept so that everyone is a winner. In the real world, someone has to win and someone has to lose.
It’s a form of natural selection. In nature, only the strongest survive. And, as they say, Wall Street can be a jungle. Is it up to Congress to play God and decide that every business must be bailed out? Or which business should be saved? There is usually a reason that the weak don’t survive.
In too many cases on Wall Street, too many people made one too many bad decisions because they were greedy. I am definitely not in favor of bailing out the greedy. Unfortunately, good people suffer because others are greedy.
Those are the people I would rather bailout of a bad situation.
In case you just woke up from hibernation (welcome back, by the way), here's a quick recap of the events that have crippled our financial and credit markets and forced the government's hand ... all in the last month:
Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and AIG (NYSE: AIG) were all bailed out by the government, while Lehman Brothers was left to fail. Just three weeks ago, we called these events the biggest financial story of the past 50 years
Washington Mutual (NYSE: WM) was seized in the largest U.S. bank failure ever and handed over to JPMorgan (NYSE: JPM).
The government agreed to backstop Wachovia's (NYSE: WB) loan portfolio to speed a sale to Citigroup (NYSE: C). A few days later, Wells Fargo trumped Citi's offer and required no government backstop.
The stock market was sent into hyper-reactive mode, spurring ridiculous day-to-day volatility. The VIX, or Volatility Index, hit its highest level ever.
We both cried. On more than one occasion.
The financial markets have been especially volatile this past week, as market participants wondered if U.S. government legislation would come in to shore up the credit markets. The plan, led by Treasury Secretary Henry Paulson, asks for -- cue Dr. Evil impression now -- $700 billion to buy the more toxic assets from the Wall Street balance sheets.
The $700 billion bailout plan is by no means an act of charity; this money will be invested, not spent. These assets would not be value-less (in fact, it's possible the government makes a profit), but it could take years to unlock their worth for the American taxpayer.
The ramifications of not passing this legislation are serious. Credit markets will freeze, businesses will take a hit, and, most of all, consumers will be pinched.
Problem is, the ramifications of passing it are serious, too. (Rock, meet hard place.) There was a loud uproar this week from Main Street over this legislation: about the piling on to our national debt, about further devaluing the dollar, about increased governmental intervention in the private sector.
Even we Fools disagree vehemently on which is the right course of action. Heck, we can't even agree on whether it should be called a bailout, a rescue plan, or a stabilization necessity.
To help you figure it out for yourself, we've put together our best thoughts from both perspectives. Read below and educate yourself, Fool!
Understanding the Bailout
Morgan Housel: "What Part of the Bailout Plan Did You Miss? " (Sept. 30)
Morgan Housel: "National Debt: The Race Toward $10 Trillion " (Sept. 30)
David Forrest and Bill Mann: "Fool Blog: No Depression? Really? " (Sept. 30)
David Lee Smith: "Some Tough Questions on the Bailout " (Sept. 23)
The "For" Argument
Morgan Housel: "Market Meltdown: What Happens From Here " (Sept. 30)
Anders Bylund: "How to Be Finnished With This Crisis " (Sept. 30)
Morgan Housel: "The Bailout: Myths, Half-Truths, and Inconsistencies " (Sept. 29)
Scott Schedler: "How We Can Fix a Crisis We Did Not Create " (Sept. 26)
The "Against" Argument
Alyce Lomax: "Fool Blog: 6 Thoughts on the Bailout Buzz " (Sept. 30)
Alyce Lomax: "Bailout: The Sucker Punch " (Sept. 25)
Chuck Saletta: "What This Bailout Means to You " (Sept. 22)
Alyce Lomax: "Fool Blog: Paulson's Mother of All Boondoggles " (Sept. 22)
~~~~~~~~
Just in case you're like me and getting more and more confused by the minute with all the information, pro and con, about the bailout, or whatever it's being called today, here is an article I received from the Motley Fools. More information that might just serve to confuse even more, or maybe something that might just explain the whole mess to you.
I still don't like the idea of bailing out any company whose management chose to make risky moves. I think any company, large or small, has to be able to make it on their own without taxpayer intervention. And this is what this is: taxpayer intervention. Sometimes it's time for the market to shake some of the detritus out.
I'm not cold-hearted, and against helping my fellow man. If a company's management makes too many bad decisions, maybe it's time for them to look for another line of work. This bailout smacks of someone wanting everyone to be winners and not have any losers. It's not a game where everyone plays and no score is kept so that everyone is a winner. In the real world, someone has to win and someone has to lose.
It’s a form of natural selection. In nature, only the strongest survive. And, as they say, Wall Street can be a jungle. Is it up to Congress to play God and decide that every business must be bailed out? Or which business should be saved? There is usually a reason that the weak don’t survive.
In too many cases on Wall Street, too many people made one too many bad decisions because they were greedy. I am definitely not in favor of bailing out the greedy. Unfortunately, good people suffer because others are greedy.
Those are the people I would rather bailout of a bad situation.
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