Sometimes your household budget gets screwed up when you encounter some sudden, unexpected costs. You know, like when all of a sudden your sewer line in the front lawn breaks and you suddenly have a $10,000 bills to put in a new line. Or medical expenses. Or an auto accident. Whatever the reason, what do you do going forward? Most of us would take a long, hard look at the household budget and eliminate some unneeded items in order to pay for the big, unexpected expense.

The U.S. is experiencing just such an unexpected expense with the probably unavoidable decision to bail out Wall Street. Has anyone really put 2 and 2 together to figure out how much our government has decided to spend in the last couple of weeks? If you haven't added all the bailout numbers up, they total close to $1 trillion dollars! And some members of Congress that are in the know have opined that this could just be the beginning of the amount ultimately needed to bail out the financial companies that were about to fail because of the bad mortgage loans, thereby stabilizing the financial markets.

How much is that anyway? $1 trillions dollars is...

-- About 30% more than it cost to fund the Iraq War for a year.

-- That's enough to increase the national debt by 10% within just a few days.

-- That's about $3,500 for every single American citizen, all 300 million of us.

-- That's an amount that will increase the amount of the national debt per citizen to about $35,000 each.

So what's our government going to do, faced with this large and unexpected expenditure? Will they cut back other government spending? Will they still decrease taxes, making the deficit problem even worse? What are the candidates for President saying they'll do?

This is a fairly important issue to all of us folks. Somebody ought to be saying something.

By the way, this is one more time that Americans have to spend lots of money to bail out people thruout the rest of the world. Yes, the underlying cause of the problem is a whole lot of mortgage loans made to people in the U.S. who couldn't afford them. But the threat to the world financial system was the result of investors and investment bankers thruout the world using the underlying mortgage-backed securities to design all sorts of complex and arcane derivative financial instruments and transactions that would unwind if the firms holding the underlying securities, or insuring them in the case of Freddie, Fannie and AIG, to fail and default on their counerparty responsibilities. I guarantee that many, many of the investors, firms and financial advisors that will benefit from the bailouts agreed to by the U.S. are not Americans!

Looks like the "rich guys" are saving everyone else's bacon yet one more time. When will it end?

I think my grandchildren and their children will pay for it.

I wish I could say I object to it, but it seems better than letting our market system collapse. It is a very sad day when we have to saddle future generations with debt we should pay. The alternative might have been scarier.

I don't disagree that what was done may have been the only alternative.

But I am mad and disappointed that our elected government makes the decision like a whole bunch of money grows in trees. Not one single person has even remotely implied that making such a decision to stabilize the financial markets will have a cost that will have to be borne by all Americans in some way. Federally-funded programs will have to be cut or taxes increased.

But no--no one is saying anything of the sort. Just print some more money I guess. Let our grandchildren and great-grandchildren change their standard of living to pay for the greed of our generation.

Somebody should be saying something.

I personally don't think the US citizens should be paying for loans that bankers gave people who did not meet requirements. Yeh, the bank wanted to give out those big loans but now when people can't pay they are stuck and we are suppose to help. WHY??? we weren't the ones who took the loans.

First of all, I dont think there is any cost to anyone unless the firms involved go into default....fact is, the Government MADE MONEY in the S&L bailout.

Having said that..your comment "Just print some more money I guess" could very well happen as the rest of the world begin to recognize our debt. I have NO confidence in congress to do anything substantial until well after the election.

Again, and I HOPE I am correct..think I am....no cost to us as long as these firms do not default !

There is only ONE reason this is getting the attention of congress so fast. It is hitting everyone of them in their investments. It is hitting their private retirement plan. If only they would act as fast to fix social security. But that doesn't impact them, so why should they. Make sure you remember this when you cast your vote to return an incumbent congressman or senator back to washington. They and only they control the purse strings.

I confess that I am out of my element in the world of banking, mortgage and finance where so much is happening so fast. I have a question that I can't seem to find an answer to. Perhaps one of the TOTV financial sages can explain it in monosyllabic expression that I can understand.

When we consummate the bail out , sounds like a wedding honeymoon, will the government own something tangible that has any value? Will they own paper or actual homes? Will they be collecting mortgage payments?

If so, does that necessarily mean some return will trickle back into the government coffers?

The answers to these questions have to compute into the wisdom of the bail out.

Thanks.

We got to this place for a number of reasons. But let's be clear, the Congress DID NOT lose anything on this. Fannie Mae and Freddie Mac should NEVER have have government claws in there. Guys like Barnie Frank (House Financial Services Committee), Chris Dodd (Senate Banking Committee Chairman), Chucky Schumer (who by his letter of June 26 knew would cause run on IndyMac Bank), and on and on. These are the Democrats (and there are more I can't remember at the moment) who need to be on trial. Why are there no hearings into Fannie and Freddie (and heading one of these was Obama's guy and the other Clinton's gal -- who in fact made millions)? What they did was criminal. The Congressional Ethics Committee is a joke. There were many warning signs about all of this. The answer is not to fire Chris Cox as McCain suggests. That was a stupid thing to say. Chris Cox as the head of the SEC investigates corruption. This short sell thing is a ruse. I could go on.... but....

So back to the original question, who is going to pay -- THE TAXPAYER. If you think that we won't get stuck for the next generations for most of this, think again. On Freddie and Fannie, the loans that become defaults we'll pay, many will not. But to blame the mortgage lenders is incorrect. Since Carter and Clinton era, lenders have had pressure to give loans to those they know full well cannot pay them. Then there are the citizens with their hands out and no accountability of their own or pride to take and know they will default. Shame on them too.

Bottom line. Throw the bums out. It takes more than this cycle to get this done. Unfortunately, some of the good ones will get thrown out as well, but that's unavoidable collateral damage. I just hope that we have some folks in the wings who are more responsible and honorable to run in the future. I am pessimistic on that too. I mean, who would want to run the way this whole mess is done. The Democrat party has fallen into Socialism and heading toward Marxism. The Republican party has forgotten their conservative values and taken up leaving their principles at the door in order to 'cross over' in bi-partisanship only to come back with their pants whipped.

And the American people need to stand up and insist we get back to moral values. Get back to the Constitution and what our Founding Fathers and men and women have died to protect. The United States is bankrupt, corrupt, and sold their souls to foreign governments. History will tell you it's only a matter of time before this country collapses and is nolonger a super power. And that my friends means a life for your children and grandchildren that is way below what we have enjoyed.

Time is running out. Now, I'm going to have a glass of wine, a nice dinner and forget all about this mess. God save us all and God Bless America

Blaming the Dems again! Ha! Why don't you read about the De-Regulator Guy!

http://orlando.craigslist.org/pol/844908421.html

My, my, my!

Most financial people agree that the two people most responsible for this meltdown are Phil Gramm and Alan Greenspan, both Republicans. Phil Gramm is closely connected to John McCain. These two brought about the deregulations which allowed the market to go wild. The irony is that this move to a free market, free from rules, has now brought about a socialistic financial market which will create a much bigger government. Are these two going to get a medal of freedom for mission accomplished?

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Will the government own something tangible that has any value?

In the case of Freddie and Fannie the government has essentially taken over the ownership and management of these companies. They have essentially been nationalized. The have extended a huge line of credit to both companies to assure they can continue to perform their role in guaranteeing about half the home mortgage loans made in the U.S. Without Freddie and Fannie, the home construction and re-sale market would come to an almost complete halt. (That would include The Villages, by the way.) The interest rate on the line is very high--10% as I recall. And I think the Feds could ultimately own both companies if they default on the lines of credit. But if they default, how much do you think the value of the equity might be? Your guess is as good as mine, but it's nowhere near the amount that the Feds would have loaned to the companies.

The deal with Lehman and AIG is essentially the same except the interest rate is 11% and the Feds would own 80% of the companies if they default on the loans. Again, the two companies would have to survive and become profitable in order for the Feds to get the money back that they injected in the bail out.

Will they own paper or actual homes? Will they be collecting mortgage payments?

I think the answer is yes the government could wind up owning something tangible--the common stock of Lehman and AIG. (The U.S, government already "owns" Freddie and Fannie, having nationalized them within the last two weeks.) They won't own titles to homes, nor will they be collecting mortgage payments. For the most part, the mortgages have been sold and packaged as the underlying assets for bonds called "mortgage-backed securities". There is always a bank or another financial institution that collects the payments from homeowners on behalf of the issuer of the securities. If homeowners default, it is that agent that forecloses on behalf of the bond issuer. What it boils down to is that everyone in this process is going to be paid fees to perform these functions and it is very doubtful that there will be much left over for the government at the end of the line.

The "of value" part of your question depends on whether the companies pull themselves up by their bootstraps and return to financial stability and profitability. If they don't, what the government owns will be worth zippo.

If so, does that necessarily mean some return will trickle back into the government coffers?

Yes, that's a possibility. As Bucco pointed out, after a number of years and after all was said and done, the government actually made a little money on their idea call the Resolution Trust, which was created to bail out the S&L's back in the late '80's. What they got back was essentially what they put into the Trust, with little if any return on that investment.

One big difference is that almost all of the assets which were foreclosed on by either the S&L's or Resolution Trust itself were commercial buildings or developable land. Those were pretty clean transactions and assets. The Trust took over the defaulted loans made by the failed S&L's and either tried to collect on the loans or foreclosed on the underlying property and then sold it for as much as they could get for it. The commercial property had real value once it was sold or leased up and a verifiable income stream could be demonstrated.

The situation with Freddie, Fannie and particularly Lehman and AIG is decidedly different. Yes, there are a combination of defaulted home mortgage loans and foreclosed property that the government would wind up owning as the result of their control of Freddie and Fannie. But the cost of foreclosing and actually gaining control of the individual homes might exceed their value before all is said and done. The assets of Lehman and AIG are decidedly more complicated. They are heavily tilted towards counterparty expectations in some very, very complicated finacial transactions involving difficult to understand derivatives, interest rate and aset swaps and the like. Often the counterparties to these transactions are foreign firms or companies that might have already gone belly up. To even understand the chances that the government would get anything back from their bailout of Lehman and AIG is almost too difficult to understand. My guess is that it will take years for even the government to understand what assets they might own if they ever had to take over either of these two companies. I'd almost go so far as to say that if Lehman and AIG don't survive on their own, the government bailout injection will be a complete writeoff.

What's really scary is that no one really has any idea whether the amount of the current bailouts will be enough. Barney Frank said in an interview today, "...this could be just the beginning."

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In the current cases, and in my opinion (after having been a banker involved in these types of deals for almost 25 years), in the case of the currently proposed bailouts, I believe that the trillion dollars plus or minus that the U.S. government will inject in various bailouts should essentially be considered the cost of stabilizing the worldwide financial markets in the fall of 2008. Personally, I highly doubt that the government will get any of the bailout money back. In the fullness of time many of the principals in the bailouts will be interviewed publicly. I will be very surprised if even one of them projects that the government will get any meaningful amount of the bailout money back.

Thanks for a great informative post Kahuana !

Kahuana or anyone else that can respond with knowledge....

Just reading how the stock market is up 40 points for the month..up 18% in the last five years.....and up 44% for the last 10 years.

Knowing that we still have the debt...does that speak well for the economy (the good performance or at least average performance of the market), and in reading how disasterous folks are posting about their investments, how is that happening ?

May sound stupid but I am very naive in this area ! I have very little but what I have has been increasing and has gone up in the last month (see Bucco knocking on wood)

i totally agree. of course i am one of a nation of whiners i guess.