Out of the dismal fog of the current financial disaster the basic and usual question pops up: How much will it cost you and me. While the big brains of the financial world whimper about billions of dollars in depreciated assets and moan about the impending doom to the American economy, the cost to the American taxpayer hangs in the balance.
Because banks, hedge funds and mortgage companies disregarded even the semblance of cautionary lending practices and then built derivatives on this rotten foundation, credit markets froze and the American economy swayed on the precipice of disintegration. Our economic failing was not just an internal matter; but, if faith in the credibility of the American economy was shattered, the international lending nations that keep our nation afloat would stop lending us money.
All of this crisis has been reported in mega-terms: too big to fail, billions needed to survive, giant financial companies will collapse, millions of home will be foreclosed. But when the aforementioned fog clears, the remaining question is: who will pay the bill?
Secretary of the Treasury Paulson is trying to save the situation by tossing it into the lap of the American taxpayer. His proposal is to have the banks shed their ill-gotten distressed mortgage securities into a taxpayer-financed bailout fund similar to the Resolution Trust that put a costly end to the S and L scandal of the 1990's. The banks would clear their books and loosen capital for lending and you and I would buy and now own the doodoo of their unsecured mortgages.
Now we have reached the critical point; the point where we find out whether Paulson and the Bush administration works for the new potential owners of this mortgage dung - you and me - or whether they succumb to the blandishments of the special interest lobbyists who have their tentacles so deep into the Washington body politic.
What does Paulson intend to pay for these bank mortgage castoffs? That's critical. The banks might value these underperforming assents at 60 cents on the dollar. That 60 cent figure serves the banks interest because that value gives their balance sheet some credibility. If Paulson agrees to pay 60 cents the American taxpayer will get socked because it is most unlikely that any future sale of these mortgaged properties will ever fetch that amount. But if Paulson agrees to pay 30 cents on the dollar instead of 60 cents, then any future sale based on this 30 cent valuation has a good chance of breaking even or may even show a small profit.
At 30 cents or some figure close to that, the onus of mismanagement stays where it belongs - with the banks. At 30 cents our interests will be somewhat covered, at 60 cents our interests will have been surrendered to those same banks. Which will it be?
Paulson's critical decision on the amount to paid for these faulty mortgages that is so important to you, me, our children and grandchildren might be made over this weekend. Stay tuned.
Nospinicus