bailouts big and small

After stepping in to rescue progressively heftier Wall Street giants - Bear Stearns, Frannie Mae & Freddie Mac, and AIG - the Fed turned to Congress asking it to okay a bailout to - hopefully - end all bailouts. Congress complied in early October '08, greenlighting the Fed to give up to $700 billion (to be given in three installments) to ailing financial firms.

Although the bill looks like it's a bailout for irresponsible financiers, the rationale behind injecting money into Wall Street is that it will ward off a credit freeze - which could push us all into a deep recession. With financial firms spooked by toxic securities, they are increasingly worried about extending credit to other firms; a credit freeze on Wall Street eventually translates to dried up credit for the rest of America. By cushioning the cash flow of weak firms, however, a bailout hopes to give Wall Street the confidence to start lending again.

The original idea was to buy up "toxic" debt that Wall Street firms have on their books (those mortgage backed securities mentioned above), but the Fed later shifted gears and thought it wiser to directly buy stock in faltering financial institutions. (NYT, WP) Plan B then became Plan C when the Treasury rescued CitiGroup and combined both models, buying $20b in Citi stock while "backing" $306b in bad assets (those assets will stay on Citi's ledger, but the government will pay for any steep losses they incur) (NYT).

The incoming Obama administration promised a new, clear approach to stabilize the financial industry. After a rocky debut, the Treasury proposed a plan to - hopefully - clean up the toxic assets once and for all. The Public Private Investment Program (P-Pip) will use $100 billion left from the TARP bailout to encourage private investors to buy up the toxic assets. The advantage of involving the private sector is that the toxic assets have a better chance of being priced appropriately and the US would be taking on less risk (if the US were the only buyer it would likely get shafted). The disadvantage is that private investors may end up reaping in a disproportionate amount of the rewards in the end (as opposed to the American tax-payer). But with the market beginning a rebound and banks looking like they're on surer footing, P-Pip soon lost its urgency - and has been largely backburnered as of June. (WP, WP, NYT, NYT, WP, WP)

Meanwhile, the Obama administration - after pressure from congressional Democrats - in February also tagged $75 billion of the TARP bailout to help refinance mortgages for families teetering toward default. (WP, WP, Treasury's summary.)

As part of the bail out package, the government is supposed to get some stock in the companies they help out (which means taxpayers could - in theory - end up making a profit if/when firms recover).

CEO pay - and golden parachutes - in those companies were originally also supposed to be limited (although in an unenforcable way - WP); Congress later tightened the screws on exec pay in bailed-out banks (WP), but Obama may try to loosen them back (NYT). (NYT, WP) Meanwhile, a flak over excessive bonuses at AIG boiled over into an attempt to retroactively tax AIG bonuses - but eventually simmered down (WP). As of June 2009, a "compensation tsar" was hired to set rules on executive pay at bailed-out firms (WP).

Congress also wrote in measures to insure oversight of how the Treasurer used his $700 billion check, but as of mid-November only one out of three oversight offices were up and really running. (WP)

As of the end of '08, the Treasury had already used up its first $350 billion of the bailout, meaning it had to ask Congress for the second half. Although Congress had the option of holding back the cash - and some lawmakers wanted to attach conditions to releasing the funds, including more transparency and a guarantee that some of the funds will go to help homeowners running into foreclosure (WP) - the Senate effectively handed over the second $350 billion in January (NYT).

As of June '09, 20 small banks had already given back their bailout money and a 10 big players were given the okay to hand back their hand out (WP). Banks ability to pay back their rescue funds is only partly a sign that the financial markets have stabilized; some worry that banks are over-eager to get out of TARP to avoid having to abide by compensation rules. (WP)

See also Slate's interactive Bailout Guide and the New York Times' ledger of where the $700 billion has gone.

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