How is the Bailout supposed to loosen up Credit in Commercial Banks

If the banks have a better balance sheet (or think they will after we buy the assets) they will supposedly lend more is the way it's supposed to go. Fear is the enemy here and confidence is the key.

 

we aren't "bailing them out". this "bailout" has been very poorly explained by the govt and media over and over again.

what the fed and treasury is attempting to do is to provide a market for the illiquid assets on the balance sheets of the banks.

sen. corker does a good job explaining things here. him and dick armey go head to head on this. corker is correct.

http://www.cnbc.com/id/15840232?video=875349358&play=1

 

yes the banks own the securities.

 

The problem is that these assets are constantly dropping in value, and are already (as far as mark-to-market is concerned) way below what the banks thought they were worth. So unless someone big and strong enough (the government) steps in to buy them, ostensibly at a premium over market value, they're going to remain there on the books and continue to eat away at the bank's financial strength, worsen leverage and increase their risk of default. And everyone else knows that, so they don't want to lend each other money for fear the other party will go belly up before the loan is due. Now that disease has spread from the financial markets to the business world at large, as the freeze in money flow means that they are now finding it much harder to find short-term financing just to keep their businesses running. And you know what that means -- downsizing, widespread layoffs, recession, deflation.

The idea is that the government can help to heal the banks books by absorbing the toxic assets on their books, making them stronger and restoring enough confidence to the markets for credit to start flowing again.

 

What happens if you are holding a CDS on one of these securities being purchased by the gov?

 

What do you mean by CD?

 

A credit default swap. Insurance on the security going into the toilet.

 

My understanding is a CDS is like insurance but not really because there was no capital behind these credit default swaps. When all the subprime mortage-based assets went belly up, the CDS basically amounted to a guaranteed pile of dog *****. The CDS is just some worthless selling point made up by mortgage firms to help secure these subprime mortgage asset sales to buyers wanting some "guarantee" in case the subprimes faultered and what they got instead was a pile of dog ***** minus the delivery. If the CDS was actually insurance, then there would have been capital behind it and those who bought these assets that faultered would have gotten some money. The banks bought this crap and some salesperson sold them a line of crap out of greed...to make a sale. Now, the ***** is hitting the fan.

So, basically alot of banks bought high risk investments which began going downhill once the new balloon interest rate kicked in on these loans...along with a worthless insurance-like guarantee thrown in to make the sale. Loanees are defaulting...and credit default swaps are exposed as worthless.

That is pretty much my understanding. Now, how this bailout plan amounts to more than a band-aid in a much wider problem...I still don't get it. I guess the government is going to use that money to buy these faultering assets, try to get them righted, and make some money off of them...versus just every subprime loan going through foreclosure. Now, the poor people who got these subprime loans are going to start getting deals where they pay what they can afford while re-working their loans to something they can handle.