U.S.S. Shipwreck
1200-1600
During the week, I have 20-hour days fueled and followed by 4 hours of sleep. The only cool thing about this is that I get to listen to podcasts on my ipod for 8 or 9 hours a night. Last night, I was listening to This American Life "#365." And what they did on this episode was break down the "bailout" into terms that even I can comprehend. So I am sending you my understanding of it, here.
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1. Companies borrow money from banks. Example: ABC Company needs $99,000. So they call the bank. The bank then goes out and finds people to make a short-term loan to ABC Company. The bank gets the money and sends it to ABC Company the next day. Then, ABC Company pays back the loan at $100,000 the following day.
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2. Investors began taking out a sort of insurance on some of the more risky loans. Say Investor D loaned ABC Company some money. They aren't sure than ABC Company will be able to pay back the money they borrowed. So what they do is go to Invester E and ask them if they will sort of insure the loan. The agreement goes like this: Invester D will pay Invester E a percentage of the loan every month (like an insurance premium). If the loan gets paid off, Investor E makes money. If the loan goes default, Invester E pays Investor D the amount insured.
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3. Multiple investors can take out insurance on other loans. Say Company ABC has borrowed a lot of money from Investor D. And say that Company ABC is not doing well and it looks like they aren't going to be able to pay it back. Say that Investor F, G, and H get a hunch that Company ABC is going to default on their loan. They can go to Investor E and take out insurance on Company ABC's loan (even though they haven't loaned them any money!) The more at risk a company looks, the higher the premiums are for the "insurance."
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4. These "insurance" plans are Not Regulated. So, if Investors D, F, G and H all have insurance out on Company ABC's loan, Investor E is not actually required to have the money to pay them if the loan goes default.
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5. Why do we care? Because, all of the banks are nervous about who has insurance out on who and they are all scared to loan to each other or anyone else. That means, the economy is freezing up. If people stop expanding companies and start laying people off instead because they can't get the money needed to further their companies, people are not making or spending money. That means more and more people lose their jobs.
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6. There are two Bailout plans. The Paulson Plan means that tax payers buy out these insurance bonds (which are virtually worthless), and the big investors get off without any consequence. The Stock Injection Plan means that the tax payers would be invested more in a way of "preferred stock." The investors that created this mess would lose out on their investments before the tax payers would.
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7. As of Friday, the bill that went to the senate contained "subtle language" that made the bill to be modeled after the Stock Injection plan.
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8. The conservative Republican bastards are doing all they can to change this. .
