Confused About the Bailout? Here's Why ...

By Darrell L. Williams

There is a good reason why you might be confused about the $700 billion bailout plan: The government is sending mixed signals. Since it first announced a bailout plan was in the offing back in September, Treasury Secretary Paulson has offered at least three different plans on how he intends to use $700 billion dollars of taxpayer money-translation, your money.

Exactly who is being rescued and why has it been changing from week-to-week?

Financial Industry in Turmoil

Wells Fargo, JPMorgan Chase, HSBC and other large banks have all reportedly been approached by regulators seeking someone to rescue Washington Mutual, which has been pounded by the slumping housing market and the subprime lending fallout.

Nick Ut, AP

Some are also speculating on which firm may be headed the way of Merrill Lynch or Lehman Brothers. Media reports have said that Morgan Stanley is pondering whether to remain independent and that it is in talks with Wachovia about a possible combination.

Mario Tama, Getty Images

A trader works on the floor of the New York Stock Exchange, Wednesday, after nervous investors yanked their money out of the stock market, sending the Dow down 450 points. The latest market plunge came after a late Tuesday announcement that the government would bail out ailing insurer AIG. "People are scared to death," one investment strategist said.

Richard Drew, AP

The AIG bailout marked the second time this month that the government put taxpayer money on the hook to rescue a private financial company. In exchange for a 2-year $85 billion loan from the Federal Reserve, the government will receive a 79.9 percent equity stake in the company.

Mark Lennihan, AP

Former Allstate chairman and CEO Edward Liddy, left, is expected to replace AIG's Robert B. Willumstad. Willumstad, a former Citigroup executive, had been at the helm of AIG since June.

AP (2)

AIG, whose shares had been on a freefall, had been on the hunt for cash to shore up its balance sheet. The Fed determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

Richard Drew, AP

The U.S. government became one of the biggest players in the nation's mortgage market last week when it took control of mortgage finance giants Fannie Mae and Freddie Mac. The two financial institutions, battered by plunging share prices, rising foreclosures and sinking home values, owned or guaranteed about half of U.S. mortgage debt.

AP (2)

The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers. The investment bank was forced to file for Chapter 11 bankruptcy protection Monday.

Jin Lee, AP

For many of Lehman's 26,000 employees, the outlook is likely to be gloomy with job losses expected to be substantial even if significant parts of the business can be sold. On Sunday night hundreds of Lehman employees were seen clearing their desks and packing personal belongings.

David Karp, AP

Last week, after posting $3.9 billion in losses, Lehman CEO Richard Fuld outlined a plan to sell and spin off assets to raise money. Fuld, 62, who joined the company right out of college, is the longest serving CEO on Wall Street.

Kevin Wolf, AP

On September 19th, Treasury Secretary Paulson announced plan #1 which was to purchase so-called "toxic assets" from banks. Toxic assets is what securities backed by mortgages and other consumer debt had come to be labeled after these once-celebrated financial innovations turned sour. Outside of Washington, few people thought this was practical or doable. The Washington outsiders apparently were right and Paulson started to back away from that plan within a week later.

That brings us to plan #2. Instead of buying "toxic assets" as a way of helping banks, the Treasury Department would now buy equity (that is, invest) and make loans to banks in need of financial capital. This was first suggested only one week after plan #1 was rammed down our throats. At least, plan #2 made sense.

There was another version as well. Let's call it plan #3. It didn't last long. In late October, there was talk of using part of the $700 billion to help homeowners and stem foreclosures. I called for a bailout for homeowners long ago. I still think it is a necessary step in repairing this financial crisis. But surprise, surprise ... Secretary Paulson has changed his mind again! As of last week, he now adamantly opposes using any of the $700 billion to assist homeowners and to stem the tide of foreclosures, a baffling position to take given that we were told that foreclosures on subprime mortgages are the main reason for the financial crisis.

As of this week, we are now officially back to plan #2. Yeah, he changed plans a fourth time, but who's counting?

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