Here’s how a bailout works, courtesy of The Denver Post…
1. Borrowed Funds
Taxes paid by individuals and businesses provide the majority of money to run the federal government. But when spending exceeds tax revenues, the government sells U.S. Treasuries – notes, bills and bonds – to raise more money. It’s like taking out a mortgage to buy a home now that will be paid off with interest over time.
2. Ball and Chain
The federal government already has $9.7 trillion in debt, more than half of it financed by public investors, such as retirement funds, insurance companies and foreign banks and individuals.
3. Federal War Chest
The Federal Reserve Bank, which oversees the nation’s banks, holds about $515 billion in Treasuries that it uses to help banks provide a steady supply of money to borrowers.
4. Credit Crunch
Last summer, when the subprime mortgage crisis hit, banks became reluctant to lend to each other, seizing up the flow of credit available to businesses and individuals and threatening markets and the broader economy.
5. Pumping Money
The Federal Reserve stepped in, using its Treasuries as the source for more than $200 billion in short-term loans to commercial and investment banks. It also rapidly began to drop interest rates to help banks.
6. Busted Banks
This year, the federal government has agreed to another roughly $750 billion in bailouts and loans, adding to our national debt through deficit spending.
7. Extra Baggage
In March, the Federal Reserve lend JP Morgan Chase $29 billion at 2.5% interest to buy investment bank Bear Stearns, which held too many worthless mortgage-backed securities tied to subprime lending.
8. Federal Refis
Congress pledged $300 billion this summer to refinance troubled mortgages through the Federal Housing Administration.
9. Expensive Lifelines
The U.S. Treasury took over mortgage giants Fannie Mae and Freddie Mac on September 7 with a pledge of $202 billion. The Federal Reserve extended $87 billion to ease impacts from investment bank Lehman Brothers’ bankruptcy, and it also loaned insurance giant AIG $85 billion to keep it from failing. The U.S. Treasury will also provide $50 billion to cover losses in money-market funds.
10. Red Ink
Taxpayers could face the potential of $1 trillion in additional costs if a proposed government plan to buy up a vast number of troubled mortgage loans from distressed financial institutions happens this week.