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How the Bailout Works

2008-10-21 | 🔗

The economy imploded as US banks reaped the consequences of subprime mortgage trades. Controversially, Congress has provided emergency funding for the banks. Learn more about the agreement between Washington and Wall Street in this HowStuffWorks podcast.

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This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This podcast dynamically inserts audio advertisements of varying lengths for each download. As a result, the transcription time indexes may be inaccurate.
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Yes, here away the time keep everyone to spend his jacket. While we need to be the bilingual check you watch from an online, I don't do what show private practice I dont biggest loser now. What about again is the fourth and last network would about until death. I never even heard of it. I would comedy such cartoons until death is a comedy birthday head. You watched any of these shows. Had you been a big fan on Wednesday September? Twenty? Fourth, you would have been very upset because they are all pre empted. I bet they were all pray.
It already. You are well aware that the economy is in the toilet. It is tat all you do. All you want to do is sit back and watch your favorite celebrities lose weight or watch brag Garret, you know tussle verbally with his wife, or you know, whatever private practice does not fully aware right. Guessing private things exactly you want. You want to escape through these and all of a sudden, here's George Bush laying it out there. This is a president who is avoided using the word recession in public and all of a sudden is basically a white knuckling right, the podium the presidential sealant right right, saying we're all gonna die. Maybe he just want to skip straight to depression, just for I guess avoid recession. Lloyd, recession go right to the present, and I know that he used the word depression now fortunate bite. He might. He may as well
right. It was bad. He said our entire economy is in danger was one quote from that very great address, an usual rare. He doesn't usually do this kind, right. I think you should have followed that sentence of immediate with with good luck to whoever whoever's coming exactly yeah, yeah, so long and good luck or whatever right yeah. So this is kind of a big deal and I think Bush addressing on a Thursday for no other reason than to tell the Americans that the economy is in danger, a kind of really made it a bigger point and the reason he went on was because he was trying to
You gonna public opinion Paulson Plan right. They also known as the seven hundred billion dollar bail. I am a just the bail out. I think people are calling and bail out ski resort on three. It is, and it's not hyphenated for our listeners is not two words. It's one word this is. This is a p right here. Ok, not us so he's on their he sovereign about the bail out, but why would he care? Why would he care with him can stick I'll. Tell you why chuck you'd any? Let me answer at the beginning of that. He has the earlier that weak it looked like Congress is going to pass it everybody's padding one another on the back. We live
isn't share beauty, remember area, but how does it Senate Democratic Republic in the leaders are saying we're pass in this right now and it starts to go into the house and that they bring to vote in all of a sudden. These rank and file republic contagious revolt, and there, like hey, come at this. We ve got another plan in its nothing like yours right. So, ultimately, the house defeats the bill sure twenty eight to five, something like that: you're making closer exactly that really good right in front of your memory like air traffic. Ok, so the house defeats the bill, it looks like it sunk. There's people you know screaming entails. Dogs and cats living together right mass hysteria array and pushes already played his one- is on the whole by addressing the nation, the only thing nice he could do, and rightly too kneecap. Somebody may be a figure skating on public television to get our attention right
I don't know terrible terrible. So it looks like the bills defeated and all of a sudden here comes the Senate right on the white. Exactly the house's, usually kind of the the congressional body. That's known for shouting down things in rice writing things. On the sly, the sentence was to be wise and sedate in calm and all of a sudden there taking up a failed house bill. Basically, overhead sweetening it like they attach them a very popular mental health build did you know that now healthcare providers have retreat mental health like they treat a physical maladies. Let's get It is good, which is one of the reasons why they put it in this bill survey pass Zappala pork in their various manufacturers of wooden arrows that I think boy scouts favoured rights and subsidies out of that
and then there's the extension of expiring tax breaks for the wealthy right, although there is also some tax relief for the middle class, new tax relief in there and another one important thing he did was raised: the FDA, Caesar Insurance coverage for our peoples. Banks accounts yet, which is huge, because banks like walk over in Washington, mutual go and under right- and I mean these earth neighbourhood branch, commercial banks- were you, keep your money and all of a sudden away, the bank's front doors locked arise. You know two p m on Tuesday I was one of them really now Banks were one of those institutions among adults too much value, a good old one that give were I'm not gonna name, my bank either, but I am very confident in it recently purchase country wide, among other things, so pretty good about my bank, which is your man under your mattress, not come with their here. I don't want to attempt the gods Circuit, the sun. It takes up the bill.
And the air the sweeteners, and they cough up Senate amendment. Fifty six, eighty five, which is the Parson plane with the mental health bill. The empty I see, increase action plan plus, is what I like to call it. Great name. Eric should acknowledge that this is the same day. They passed the same day that they took this up right in the Congress. Never acts. This fact: even more amazing. Two days later, the house gets it that day they pass it. I think they pass it like twelve thirty and they started deliberating on a ten in the morning, grasped it too have hours later, I wondered when it happened. If no one really knows is probably but it was the sweeteners actually or if the house ended up with some egg on their face, with the first vote and real that everyone was really freaked out by the fact that the defeated at what I think of number one, I think pushes address actually did have a real impact There was a wide CNN. Actually, what CNN live? As the house is voting on this this amendment and
There are a lot of vague congressmen who her countries, people who said that they switch their vote because the calls that they are getting from their office changed from you know. I don't like this bailout package to you. Ve got a vote for this bail out, tat right and then actually change votes, and you can probably directly linked that the Bush you know looking very tired and haggard and scare Wednesday, sixteen September twenty four right. So I think that one of the reasons why the house actually passed- you know my uncle's, a former congressmen. I've met you give him a currency. Would he thinks about the whole thing? Where are you from? he's a congressmen in Tennessee two to three terms. I think that's great news for him. Ok, so it passes right right and it is actually longer a seven hundred billion dollar bail out the the bailout, seven hundred billion, but this bill actually hiked it up to eight hundred and ten billion dollar bill. Did you know that
You know I didn't know that all the other. What is an extra owners and hundreds in Bohemia like mad right in the weird thing, is: is taxes these days? You will you dont, you? Don't really Philippines, like you, think about the government shelling out seven hundred billion dollars? How are we going to feel at pinch right and you know actually for every American its? I think twenty three hundred dollars a person real every american taxpayer Non, so we're gonna feel a pinch somewhere or are we let's get into this bill chuck looking into the meat of adds to it? So you wanted you wanna led off with what are some of the things that are inside. I see by you, burying your teeth. Well now. I know that it's at that one of the things they signed off. One was an immediate three hundred and fifty billion the candidate in stages, which I might add that I am no economists was himself. He can't smarter way to go near three hundred fifty billion upright and
spare money and then the new newly created office of financial stability, which we hope it ends up living up to- major another. Three hundred and fifty I'm sorry another billion after that and then another two fifty after that, but about those need approval by Congress. Yet, and I think that the first one the hundred billion has to get approval from the house and the second two hundred and fifty billion is, is contingent upon Senate approval. I think, but either way yet Congress has to approve these and they have the they'll approval. If this whole thing's working right, I dont see them saying. No, though now I mean, I think in four three hundred fifty billion in for
hundred and fifty billion right place. It would be it would Kennedy assign hey. We did the wrong thing by allowing this first three hundred and fifty billion, so I don't think they do that you're. Angry simultaneous agree. So, like you said that if this this bill establishes a brand new office, Rina Brand new office right out, like you, said the officer, financial stability, and this is led by the Treasury secretary now, I said Henry Paulson, but whoever right is that what they just named? Actually yesterday the new bailout chief, oh really, who yet you dont No there's no addressing new gymnasia. His name is Neil Cash, cash cry and disguise thirty. Five years old, holy cow yeah and he's going to be in charge of doling out the care he's overseeing office, a financial stability. He was a previously a vice President Goldman Sachs and before him and finance he developed
Ology for NASA Space Mission, Sir, the sky was clearly doing things in college that I wasn't doing yeah. No thirty, five, that's not a very long existed he seems of sharks. Ok, so we have a brand new tsar of economic stability. I get yet in fresh, fresh meat and with this oh I'll bet you he just twenty years over the next six month year. So basically, what this guy is going to be in charge of essentially is buying up terrible investments that that you know, banks and investment banks and, in the other kinds of firms, have on their hands what a weird job it is aware. Job it's never been done before hours. I now basically there's certain types of investments that can be bought in all of them are related to mortgages. Gallic mortgage backed securities. I think Clare,
There are legal actions would be purchased under this and mortgages themselves. Right, I thought was kind of cool, because this is actually one way that it could directly benefit a homeowner. One of the provisions in this act is that win this guy with his name again, Neil Cash Cry or cash carry him the tray pronounce. It lists concussion curry when cash for eyes negotiating with these investment banks and other people to purchase their bad securities he's going to try to force down their throats restructured. Of the mortgages right. The hoped for homeowners act, yeah. Now the big problem with that and what it is. It's it's it's basically, I congressional support for restructuring loans, sure knocking down the principle which is pretty
oh yeah, you borrow four hundred thousand for a house. You can't afford it now. The sudden hours can pretend like you only by two hundred thousand, that's huge. The thing is: is it's it's a its voluntary programme. I think you probably get like in a text rebates or write offs right. Here's a company or a lender that engages in this, but you can't force any way to do it right. If the USA actually owns your mortgage chances. Are there going to be very hesitant about for closing on you? Never one? This is a huge pain right, but number two. They actually have a vested interest, then, to keep you in your house right. Ok, the reason being that if they can stem the tide of foreclosures, then the market starts to come back up, and these mortgage backed securities and mortgages, yourselves increase in value I'll, send their worth more in the planned work right? So if, if the government buys your mortgage, you should probably thank you lucky stars right.
And, as is all this, is a theoretical men of it's been put into practice. Yeah right, which is, I think, a lot of people are kind of nervous about, was paler right. I know I am. I do know that that foreclosures, actually nobody went in for closure. It's not like. I, because I did some Risa Sherwood article on last year. It's not like banks for close on people in there. This more nearly kick you out of the house. Banks lose money too sure, but you know, like we ve mentioned before the mortgage backed mortgage backed securities, sometimes the bank's don't even that house. They turn around and sell it to securities and it gets fractured often so maybe that's kind of where the problem started. Well, you know who does Winona foreclosure per someone who's running Now, if you are a runner- and you don't buy in this in this climate- you, your total sucker yeah Sprague, attended by how it's an excellent time, thereby dislike afar, sail out. There have said it before. I say it again: right detract together, buddy getting
Yeah thanks. Silver said the only thing that this this cash car he's going to be doing this guy's got a lotta responsibility, not sure is a nose, it is getting into a frankly have safe. I will fishy that Henry Paulson is one of the former high level executive, the Goldman Sachs in he tapped this guy from Goldman Sachs yeah, and you could say, while he knows we worked with me. Had he respects him, but I believe I already ordered I, like wine investment bank being so entrenched in this pale. Actually, you actually worked in the office in the Treasury office. He was previously with Goldman Sachs, but you know I know to me I gotcha his influence. Is he like pulses protegee or something I don't know? Maybe caution yeah, ok, so there's other things that cash car he's going to be in charge of thy gum. I win. The government purchases three.
Million dollars or more of bad investments, from a wonder who, whoever, ah there automatically the automatically take a warrant in your come, right. This is a non voting block of shares. This common stock share joy right, and this is actually really ingenious. Chuck you wanna tell everybody why. I dont know why. Let me tell you: why are you here the econ mass, this straight from cash carried to me too? You ok! Actually there, True, it always involve cut that further the reason why it such an ingenious provision is because no one has any idea how how to value these mortgage backed security
I read an article with the guy who who is like this expert it valuing stock that you found in, like your grandfather's closet from nineteen twenty three years of this guy devalue, the sky and everyone else is totally lost at it properly, valuing mortgage backed securities and scenarios and into all these other bad investments right. So, whatever the government, so whatever price a government set to buy, that it could be a way to love right. So if you are companies selling this to the government in you end up experiencing a windfall profits from the sale which you're not supposed to be the governments covered on the backside because
on shares in your company now right. So if your experience a profit, yours, your price per share rises and the government get something out of it, because they ownership right and in theory, ultimately the taxpayer. It would come back to us on the holding a breath, but what we want is for this bail out to work yet in technically it could work and if you think about it right, if the government bicep seven hundred billion dollars worth of mortgage backed securities, are mortgages whatever and all of a sudden, the markets stabilizes, because vit, maybe over the course of a couple years, maybe a decade who knows the market comes back into full swing at these things, don't just disappear. They noticed vanished the governments not going to take these these securities and throw him in a furnace. Throwing aside on basic lecture, I think is push put it there that the? U S, government, the only institution large enough to buy these and sit on him for a while right and then once
Margaret Z, things increasing value when the government sells them and in new, if they sell em well, not flood the market. With these things, then we should, as taxpayers, see a windfall from that right. I mean, even if, if the combined value volleys things double that not all my worthless, there are some good, more respect. Securities out there still, but they just have a bad name unknown want some right. They increase in value. I mean even if they double that's one point, four trillion dollars right from from the sale and half of that being pure profit, there'd be pretty good. They would whether that happens or not it to be seen right. You know what I think would be interesting. If all the sun they put out this big plan. Bushes, were the only people institution big enough to do this, and all the sudden, like Bill Gates and Warren Buffett Stroll at behind him and say not so fast. We ve got our own plan and they just bought up Pino eight hundred billion dollars worth of of bad investments. Warren Buffett, been, I
buying spree right now, of course, is not just a guess. I'm just a good time to buy a house, therefore closed house to get time by stocks, yeah say again like fireside. Crazy of a year apparently from what I understand from watching. The recent second presidential debate is that Obama me TAT Warren Buffett for Treasury Secretary now be all for it makes a lot of censure. So were anything else in this provision, maybe of the Golden Parachute, oh yeah, that's the one thing that I pray made a lot of people. I feel a bit better: the gold, the famous golden parachute, I've autumn's, when companies go under like other big Enron thing. You remember that additives are the ones that come out on top and the investors lose all their money. These executives get these huge pay out at the end and just kind of sneak out.
Actor and by their islands in Vienna, in the in bermuda- and I know this calls for no golden parachutes. These big, multi million dollar severance packages are not gonna happen. Knowing specifically your top five, executives any any salary over five hundred grand can't be deducted as an expense right, so that in theory, should limit companies from doing there. Some problems with that, though, with that that's just your top five executive richer. Another problem with it is that the cap there is already a cap that exists, but it that one million you can't you can deduct any salary over one million so really for a major company. All it's gonna be is two point: five million
ass deductions, which is nothing right, thought I can from the other problem. This is the biggest problem. There is no provision in the Golden parachute clause of this law, the bail out bill that says anything about stock options, so you think about it, you a? U let an outgoing ceo go you're like you, you did a terrible job managing, but here take only stock options right, value met today's terrible market price right just hold off a couple years. The markets gonna come back in you, you cashing your auctions in your ear, just richer than an aspirin, right that that's I'm glad you said that cause. I don't even know that, but that's what I was just about to say as the way these guys operate. I had a feeling There is always some back door where they get theirs.
And then they are well there's not going to be any way of going around it. That's the only thing. I think that that we can hope for is that there should be widespread investigation and probably in a criminal lawsuits against a lot of people who are running the show yeah, I think This'Ll be under the microscope by more than other little quieter bills ago. Financing sewing, I think so too Why? If you want to know anything more about this, I would strongly I commend you, exercise their civic duty and how will the governments spend the seven hundred billion dollar bail out fund on how stuff works that come in around to find out one more reason why you shouldn't where a blue tooth had said the first Chuck message from our sponsor hey everybody. I wanna talk to you about your website that doesn't look good and this hard to program because square space does it better yeah they do square space.
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Transcript generated on 2020-01-28.