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bailout bungle?
Nov. 12th, 2008 01:17 pmOK, let me get this straight...
Take a deep breath and read this sentence out loud:
Much of the current economic problem is due to a burst housing bubble nightmare in which housing prices dropped while balloon mortgages jumped and millions of people ended up in foreclosure which resulted not only in terrible financial stress for the people involved but for the mortgage institutions as well which ceased having sufficient capital to make loans and the economy skidded to a halt. <--- look! a period! Breath now!
Congress agreed to allocate $700B as a bailout fund for the curent banking problem. Congress agreed to make this allocation (despite having less than no money itself) for the purpose of buying the bad loans from the banks. Now, however, it appears that instead of buying the bad loans, the government is instead going to buy shares of the banks (directly from the banks, not the public stock market), which will infuse money into the banking system that the banks can then use for loans. At least that's the idea. However, the banks are not required to use the money for loans, so instead banks are using the money to buy other troubled banks. Thus the American public is paying for these mergers while the economy is still standing still watching its own toenails grow.
To make matters even more interesting, apparently the IRS or the Treasury or some such institution of wisdom decided to make changes to existing tax regulations. It used to be legal for businesses to buy failing companies as tax shelters -- using the failed company's losses to offset the parent company's profits for tax purposes. About twenty years ago, Congress put limits to this kind of tax shelter. The Treasury has now negated that law, and this makes bank mergers very attractive. So not only will taxpayers foot the $700B which might be used to help banks merge, but those same banks will avoid paying more than $100B in taxes themselves because of those same mergers.
And guess what! Now there is also talk of using some of the $700B to help bailout non-banking industries (like the failing US auto industry).
Most of this is readily Googleable, if you want more info. Below is one link that is tough to find, on the Treasury action.
Washington Post article about the Treasury ruling.
Take a deep breath and read this sentence out loud:
Much of the current economic problem is due to a burst housing bubble nightmare in which housing prices dropped while balloon mortgages jumped and millions of people ended up in foreclosure which resulted not only in terrible financial stress for the people involved but for the mortgage institutions as well which ceased having sufficient capital to make loans and the economy skidded to a halt. <--- look! a period! Breath now!
Congress agreed to allocate $700B as a bailout fund for the curent banking problem. Congress agreed to make this allocation (despite having less than no money itself) for the purpose of buying the bad loans from the banks. Now, however, it appears that instead of buying the bad loans, the government is instead going to buy shares of the banks (directly from the banks, not the public stock market), which will infuse money into the banking system that the banks can then use for loans. At least that's the idea. However, the banks are not required to use the money for loans, so instead banks are using the money to buy other troubled banks. Thus the American public is paying for these mergers while the economy is still standing still watching its own toenails grow.
To make matters even more interesting, apparently the IRS or the Treasury or some such institution of wisdom decided to make changes to existing tax regulations. It used to be legal for businesses to buy failing companies as tax shelters -- using the failed company's losses to offset the parent company's profits for tax purposes. About twenty years ago, Congress put limits to this kind of tax shelter. The Treasury has now negated that law, and this makes bank mergers very attractive. So not only will taxpayers foot the $700B which might be used to help banks merge, but those same banks will avoid paying more than $100B in taxes themselves because of those same mergers.
And guess what! Now there is also talk of using some of the $700B to help bailout non-banking industries (like the failing US auto industry).
Most of this is readily Googleable, if you want more info. Below is one link that is tough to find, on the Treasury action.
Washington Post article about the Treasury ruling.
