Bailout--What is the Government Doing? Let's break it down...

Here we are, Thanksgiving Eve, 2008. The Bush administration is coming into the last 10 yards of the great Presidential Relay, and they are dog-tired. As they stumble, and lunge ahead to pass the baton to Barack Obama, they are also passing along the piano that is tied to Bush's back, known as the financial bailout. We keep hearing things about this, but what is the size and scope of what we are talking about?

Let's break it down.

I read an excellent article today in the New York Times (page A24), laying out what the Feds are trying to do.

So let's break this down some, shall we:

1. The Federal Government--your neighborhood Insurer--Think of this as your dad, or your well-to-do-uncle, co-signing the mortgage on your first house, or co-signing your first car, when you were younger. Your dad doesn't pay the loan back unless you can't make your payments. Since most of you have been 17 years old, and in this position, it should make you a little queasy to think about the fact that if you missed a payment, you may have gone to that same Dad for the money, and he probably gave it to you, as long as you promised to mow the lawn for the next decade, or so. If you substitute a prominent bank as you, and the federal government as your dad, you pretty much have the situation right. But at this point, we are where we are. So let's go through the specifics:

a. Major Bank Insurance--First, the Fed wants to basically insure the debt that the major banks would like to issue, to keep their businesses running. They have committed to doing this for as much as $1.5 TRILLION through June of next year, which sounds sky high, except for the fact that they will only be guaranteeing the bonds in case the institutions go belly up.

b. Citi-specific--Specifically, $306 Billion of this amount is earmarked for Citigroup, which was announced over the weekend.

c. Money Market Security--The fed is also guaranteeing Money Market funds, as if they were Certificate's of Deposits, up to $600 Billion more. They have spent $70B so far.

d. Fannie/Freddie Insurance--The Treasury will cover losses on Mortgage foreclosures, up to $200B. I suppose if it gets higher, we are in a whole NEW heap of trouble...


2. The Federal Government--your friendly Investor--The Feds are also trying to "encourage" the banks to get back to their business--notably by doing the following:

a. We'll "buy" your commercial paper--promising to inject funds into these banks by "buying" Commercial Paper from these banks that may need additional capital. Again, the commitment is $1.6 Trillion. The actual funds spent is far less--only $266 Billion

b. TARP--ie, We'll just GIVE you the money--under the guise of "direct investments into the financial institutions. Hey, they have only given away $330 Billion at this point. We know $85B went to Citigroup and AIG. Where did the rest go, anyway? Do we really need to know what happened to $245B of our money? If you asked that question of your teenage daughter, she would probably throw a fit, and ask you why you didn't just trust her to do the right thing with the money. And that's pretty much what we have heard from Paulson and his side-kick, Neel Kashkari (Hopefully Neel will be more prepared the next time he faces the Congress...). Anyway, in addition to the $330B spent, there's a commitment to spend an additional $370 Billion. But at least the Treasury has to trudge themselves all the way up to Capital Hill to get the money. Oh, and they have to be insulted by about 50 Senators and Congressmen, and then they will just get the money.

c. We'll just "invest" in our OWN Products, so there!--The Feds will also buy an additional $600 Billion in mortgage-backed securities from Fannie, Freddie, and Ginnie Mae (yeah, don't hear much about Ginnie, or their black-sheep cousin, Sallie Mae much. They must feel left out).


3. The Federal Government--your local Lender--when all else fails, it's time to get into the lending act yourself. How hard can this be, right?

a. Term auction facilities--Making $900 Billion available for 1-3 months to other financial institutions. So far, they have lent out $415 Billion of that. Wonder how that's been working out so far? Me too.

b. We'll just lend it ourselves--Another $550B lent right out of the Fed discount window. To you and me? Nah, to the banks. So far $142B has been lent. Yeah, I am curious to know how THAT one is going too.

c. Term Asset Backed Securities Loan Facility (TALF)--TALF? Seriously? It's bad enough we all got to hear about TARP, which basically was them admitting they were throwing a tarp over the corpse that is the current federal banking system. Now we have TALF. A lending facility for investors who are already holding securities backed by consumer and small-business loans. Commitment? $200B.


WHEW! That's a lot of info there. What does it all mean?

It means that there are an awful lot of ways the federal government is trying to rebuild Humpty Dumpty. All the kings horses and all the kings men are trying to put Humpty together again, piece by piece.

Let's see whether they can get there before the automotive industry goes bust. Then we can have this discussion again, about 3 weeks from now.

Anyone got $7 Trillion handy? Wait until we get to Medicare, 2010...