The Wall Street Bailout: Congress Agrees To Screw The American Taxpayer

Well, they're going to do it. Despite the fact that the vast majority of America is against it, Congress and President Bush have reached an agreement that will bailout the floundering S&L's which got themselves into their own mess and are now holding their hands out to the American taxpayer for relief.

In short, this bailout means that while the taxpayer is getting screwed, the ones who caused this problem will be getting kissed.

Even the members of Congress don't fully understand all the provisions of this legislation. There are so many things that can go wrong with it that no one in their right mind would ever vote for it. Robert J. Samuelson over at NewsWeek made some intitial observations:

Under Paulson's proposal, the Treasury could buy distressed mortgage-backed securities. Consider a batch of hypothetical securities originally worth $100 million and paying an interest rate of 6 percent. They're no longer worth $100 million because half of the homeowners have stopped making their monthly payments. Suppose, then, that the government buys the mortgages for $50 million. It earns 6 percent on its $50 million, and if it borrowed money at 4 percent to buy the securities, it would make a tidy profit. If the government holds the securities until maturity and all the remaining homeowners repay their mortgages, the government would come out ahead.

Read that last sentence very carefully. "If the government holds the securities until maturity and all the remaining homeowners repay their mortgages ..."

How many of you reading this blog believe that all of those homeowners will repay their mortgages? How many of you believe that even half of those homeowners will repay their mortgages? For those homeowners who fail to repay, who do you think is going to pay?

If you said, "The American taxpayer," then you are absolutely correct.

Here are a few more variables that no one in their right mind would predict for the better:

First, we don't know what price the government would pay for the mortgage-backed securities. There are conflicting goals. On the one hand, the government wants to minimize the bailout's costs to taxpayers; that would favor paying the lowest possible price. In my example, the profit would be greater if the government paid only $40 million. On the other hand, the whole idea of the bailout is to help banks and other financial institutions get rid of risky assets and replace them with cash that would encourage a resumption of normal lending and investing. That favors a higher price. If the government paid $80 million instead of $40 million, say, it would lose money. Second, we don't know how a weakening economy will affect future mortgage repayments. The worse the economy gets, the more homeowners will default. At the end of June, about 2.75 percent of home mortgages were in foreclosure, and an additional 6.4 percent were at least 30 days behind in their payments. The unemployment rate was 6.1 percent in August. If it rose to 7 percent or higher, defaults and delinquencies would climb. In my example, if only 25 percent of borrowers repaid their mortgages, the government would lose money.

In short, it is a good bet that this latest attempt at government intervention is going to blow up in our faces somewhere down the road and once again, the American taxpayer is going to be forced into paying that bill too.

This bailout is a bad idea. It needs to be killed pronto.

You can access the complete column on-line here:

What Is It Really Going to Cost?
Robert J. Samuelson
NewsWeek
September 25, 2008