There was GM!

Some of the money the US Treasury 'invested' in GM may not get paid back.

So, we might say that GM got 'bailed out'.

Hmm. As I understand it, there was a little more to the story:

One approach to GM was just to let it go through an ordinary bankruptcy. But DC didn't want that.

Why? My understanding is that in an ordinary bankruptcy, GM would have gotten off the hook in their labor contracts to pay for retirees' health and pensions but, then, by law, the US Federal Government, that is, taxpayers, would have to make up the difference.

So, if all these guesses at the facts are correct, then, net, the 'arranged' bankruptcy essentially wiped out the stockholders, cost the Treasury some money, gave much of GM to the UAW pension and health care funds, and got the US Treasury off the hook for propping up ('bailing out') the UAW pension and health funds, then maybe, net, the Treasury came out best possible!

So, when there is screaming about the 'bailout' of GM, remember that the final arrangement was likely the "lesser of two weevils".

For the GM stockholders, well, GM messed up big time. So, first cut, in simple terms, it was up to the owners, that is, the stockholders to take the loss.

For a real 'bailout', there is Solyndra, ESPECIALLY after the renegotiation that had the taxpayers go from being first in line to get paid to being last in line to get paid.

And AIG was a real 'bailout'. The idea of bailing out AIG was to stop the spread of the sickness just at AIG. In part AIG was a bailout because it was not at all clear that AIG could repay. Last I heard, AIG may actually, finally, by slowly selling off everything it had, including its pens and pencils in Hong Kong, be able to pay back all the Federal bailout money. It was still a bailout.

But TARP, no, that was a vulture capital loan from the lender of last resort, the US Treasury, not 'help', not a 'gift', not really at risk, and not really a 'bailout'.

Of course, in all of this, the real villain is DC and what it did, especially having Fannie and Freddie back junk paper, in blowing the housing bubble. Why was the bubble so bad? Because during the price rising, there was a lot of dirty mortgage manipulations going on. But mostly the problem was that when the bubble burst, the 'reserve capital' of much of our banking system was wiped out and about 50% of the houses in the US went 'underwater'. So, we drained the financial capital lubricating oil out of the crankcase of our economic engine; the engine stopped; and millions of people in the US were seriously hurt.

Here's the situation: Banks will make loans on assets. But if the banks make enough loans on just some focused assets, then the asset values will rise which will let the banks make more loans on those assets, ..., and we blow a bubble. Then when the last loan is made, prices start to fall; the banks don't get paid back; the financial system dies; and the economy dies. So, really, don't want banks making loans on 'financial assets'. Well, for stocks, after the Great Depression, we stopped that. But with housing, essentially the same scam got started again, with the help of Fannie and Freddie.

Fannie and Freddie, along with the Federal Reserve, along with major parts of DC cheering it all on, were the real problem. The last time we did that, a wacko house painter and some of his buddies killed 50 million people, or maybe it was 100 million, I can't remember just exactly.

We shouldn't do such things. The media should keep us informed so that we don't.

The PBGC is capped at $54k/year and no benefits. The government would not have had to pay for retirees health benefits (often described as "gold-plated"), and only would have had to pay for part of their pensions.

http://www.pbgc.gov/wr/benefits/guaranteed-benefits.html

Also, in the event of bankruptcy, secured bondholders would have been paid before unsecured union benefits. The bailout was circumventing the rules of bankruptcy in order to minimize damage to the UAW. I wonder why?

http://www.opensecrets.org/orgs/summary.php?id=D000000070

As for even AIG getting a 'bailout', I don't quite agree with that. Yes, they did get a ton of money, on seemingly 'cheap terms', but the logic is the same. If the insurer of all these financial instruments can't honor it's contracts...imagine the implications for the economy as a whole. Not only would they be reneging on contracts, enshrined in law, but many firms that purchased all sorts of insurance (not just on CDOs) - GE, Walmart, etc - on various assets/products would instantly be SOL.

So even if you take just the financial firms and their tanglings there out of the picture, in terms of getting back 100 cents on the dollar on their CDS Swaps, if AIG can't honor ANY of their contracts at a time when companies (all throughout the country in hundreds of industries) are experiencing softer aggregate demand and falling revenue, just that alone would be catastrophic beyond anything we have ever seen.

So I don't see it as an 'AIG bailout', but rather saving the US economy. Besides, they will be able to recoup their investment once they finish selling the useful assets and repairing the balance sheet over the long term.

Also, it's not just Fannie and Freddie that are to blame - as Bernanke said the exhorbitant global imbalances with countries running massive current account surpluses that creates an incentive for investors to put money to work. China doesn't want it's $3T sitting in cash, even just $100B sitting in cash could cost China about $2B - $10B/year depending on where it is sitting (just in inflation alone). So the pressure to at least do something to protect it against inflation is immense and that's just China.

Suffice it to say, there are many factors (from the mortgage tax credit to Fannie & Freddie to global imbalances to misaligned incentives on Wall St.) that are to blame. The damn media likes to play on the most populist and it's annoying.

One of the things I can say, is that I am impressed that people like Bernanke and Paulson can hold their nose and go against EVERYTHING they believe in (i.e. non-intervention in markets) and everything they have been taught and learned over their entire professional careers and completely violate these beliefs in a matter of days/weeks. It's easy to sit on the sidelines and vilify these people for their actions, when you don't quite understand the implications of non-action and even how tough it was for them to make those decisions. The fact is, these people ignored their beliefs and acted in the country's interest.

I am not even American and I can admire their actions.

Edit 1: To put their actions into perspective, it's the equivalent of being a 'pro-lifer' your entire life and in order to save the entire country you have to personally sanction wide-scale abortions. How many people would be able to do that? Might be a little dramatic, but I believe the parallels are similar.

I was 100% for the AIG 'loan' for just the reasons we both explained. But since it was not clear that AIG would ever be able to pay back all the loan, I was willing to call the loan at least in part a 'bailout', that is, 'help' or a 'gift' that might not get repaid.

It's too bad the media wants to use the Paulson, Bernanke, etc. excellent efforts to save the US and most of the world as a source of a coveted scandal by screaming "bailout", but, again, I fully agree with you that what the US did for (with) AIG was just essential.

I will insert: The stuff about a 'balanced budget amendment' and, much worse, Ron Paul's desire for essentially a gold standard instead of a Fed, would mean that there would be no Federal 'lender of last resort' which would force us back to the results we got in the 1930s when we were far too afraid to print money until people started shooting at us.

In addition we would not be able to fight any major wars at all; we might as well shut down most of the DoD.

Paul seems to believe that the Fed is the cause of all bubbles and that with a gold standard we would have no bubbles; history clearly shows otherwise. Even with a gold standard, there still is 'fractional reserve banking' and the possibility of bubbles, crashes, financial 'panics', etc. As I recall the history, at one point J. P. Morgan personally saved the financial system, and that situation was much of the motivation for creating the Federal Reserve.

Moreover, I'd go farther: A comparatively few bucks would have kept Lehman afloat long enough mostly to 'unwind' slowly. That is, there is a good chance that Lehman was mostly the victim of a 'run on their bank', some of it urged on by some short sellers. Sure, I would have expected that the Lehman stockholders would still have lost their shirts, but keeping Lehman going for their 'counter parties' might have greatly reduced the effects that gave us the Great Recession. Houses would still have gone underwater, CMOs and CDSs would still have been in trouble, but some of the intensity and volatility would have been reduced. Alas, the media was so eager to scream 'bailout' that it would have been politically too hot to 'save' Lehman, even if all the owners lost all.

For Paulson and Bernanke going against their beliefs, that shouldn't be too difficult! No one should ever have taken all that simple minded stuff as always 100% true anyway! Besides, Bernanke was a leading Great Depression scholar. Also, Paulson saw instantly the threat of 'bank runs' and 'cascading contagion'.

I do fault Greenspan for drinking too much Ayn Rand Russian Kool-Aid! Of course eventually he admitted before Congress that his belief that the firms would do the right things was expecting too much.

I do have some remaining questions: (1) I can understand what Country Wide and Fannie and Freddie did. But I don't fully understand the other flows, e.g., through the ratings agencies and the 'tranches' and to the CMOs and their CDSs with AIG, etc. I don't have any good data on how much of the paper was held in small banks, large banks, outside the US, or where. Just why the problems were mostly just in Florida, Arizona, Nevada, and California but not the rest of the US I don't get. Just why the problems in just those four states did so much damage to housing and the economy nearly everywhere in the US I don't get. Just what happened to routine commercial banking and why I don't have either good data or good understanding. (2) Actually there were some surprisingly similar housing bubbles outside the US, at least in Australia. So just how the US housing bubble made it to Australia I don't get. Then Canada was largely immune; just why Australia got sick but Canada didn't I don't get.

We should ALL have GOOD data and answers to these and other questions and should have had all along during the bubble blowing over the past 10 years. We didn't. At least this time we're not at much risk of a Hitler, but we've come close and are not fully out of the woods yet.

As for Ron Paul's abolition of the Fed, I couldn't agree more. It's a bunch of crock. All you have to do is look at the history of recessions: http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite...

I mean...really, the longest time period between recessions in that approx 90 years (1836 - 1926) was 5 years. Imagine that, literally...over other year (almost) America had a recession. That's batshit crazy.

Is THAT what we want to go back to? Fractional reserve banking and central banking is the damn cure to all of that.

Ron Paul is off his knockers when he talks about this stuff, and the most painful part is that so many people listen to him. They don't know any better.

As for your questions, as far as I understand it, the housing bubble CDOs were just the tip of the iceberg. When I lived in FL, there were many small community banks, that went bust because they held tons of CDOs backed up by subprime car loans and credit cards - YES!!! These guys were insane.

As for Canada, the truth is, I don't quite get that one either...because as far as I know, the 'standard' mortgage up there is actually a variable rate. I haven't done much research into it, but I have a few friends that live up there and are goin through the house-buying phase now. It's so bad that we had a debate about whether 30-year fixed mortgages even exist anywhere in the world. I kindly linked him to the relevant US regulators that explicitly show rates on up to 40-year fixed. He was flabbergasted. So, I honestly don't know what's happening over there.

I agree that we should know, I am sure the data is there...I have just been busy trying to keep my startup dreams alive (no time to do all that research - as much as I would love to).

Yes, one of the reasons a bank had architecture borrowed from some ancient Greek temple was to convince depositors that the bank was 'solid' and not about to go bust, which long far too many banks did.