The government on Friday began to assemble what could be the biggest-ever U.S. bailout, sketching plans to ask Congress for broad authority to restore confidence in financial markets by rescuing banks from bad debts and taking over worthless mortgages and other distressed debt and assets.
Here are answers to some questions about the plans and earlier financial bailouts. Associated Press
Q. How would it work?
Absent details, it's hard to say exactly. It still isn't clear whether the government would buy just the bad mortgages or actually take possession of foreclosed properties and banks themselves. Treasury Secretary Henry Paulson indicated that there would be some government entity to oversee the process.
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In the late 1980s, the government set up the Resolution Trust Corp. to help clean up the savings and loan crisis. It acquired defaulted mortgages, foreclosed real estate and other assets of nearly a thousand failed S&Ls and slowly sold them off, restoring order and stability to the system.
It followed the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses.
Q. Who would pay?
Paulson and President Bush indicated there would be significant exposure to taxpayers. Paulson said the program would cost “hundreds of billions” of dollars. The exact cost would depend on how many companies are “rescued” or taken over, and how far home prices fall. Resolving the S&L crisis took six years and $125billion in taxpayer money – roughly equal to $200 billion in today's dollars.
Some economists have suggested cleaning up the present mess could cost more. But the proposal aims to identify problems before failures occur.
Q. Who is supporting such an approach?
Bipartisan support seems to be building on Capitol Hill. On the campaign trail, Democratic presidential nominee Barack Obama said it was critical that leaders in both parties work in concert. “Truly, we are all in this together,” he said. GOP presidential candidate John McCain said leaders should put aside partisan differences and “any action should be designed to keep people in their homes and safeguard the life savings of all Americans.”
McCain has also proposed a separate plan to set up a new agency that would work with troubled financial companies and, in extreme cases, could take control of the companies and their assets.
Q. How does this affect savings and checking accounts, certificates of deposit and money-market accounts?
Through the 75-year-old Federal Deposit Insurance Corp., every savings account, checking account and certificate of deposit is insured by the federal government for up to $100,000. The government on Friday agreed to extend similar protection, at least temporarily, to money-market mutual funds.