WASHINGTON — Despite a live presidential explanation Wednesday night, two days of testimony by top government officials, and an endless series of lawmaker press conferences, many questions about the proposed bailout plan persist.
Below, we offer answers to some frequently asked questions:
Who is this bailout supposed to help?
President Bush and other administration officials are casting it as a benefit to Main Street. "This is all about the American taxpayer," Treasury Secretary Henry Paulson testified this week. "That's all we care about."
But, really, the administration's aim is to unstick the financial markets. It wants to get lousy assets off financial companies' balance sheets and get credit flowing again.
Of course, if that happens, Main Street benefits too. But opinion polls show that few Americans make that connection. Mostly, they are upset that an economy politicians told them was just fine is suddenly imploding to the tune of $700 billion. Asked how his constituents feel about the bailout, Sen. Sam Brownback, R-Kan., described them as "hopping mad."
Why doesn't the government just buy vacant real estate? Wouldn't that be easier?
In theory, that looks like a more direct solution. If the government bought these properties, it would put a floor under the real estate market, and that's the goal here. Stable home prices would curb defaults, which in turn would mean the securities backed by these mortgages would perform as promised.
But achieving this is not as easy as it sounds. First, the government would have to identify which properties to buy, and even if it could, doing so would only solve part of the problem.
That is because the government could not buy properties that had not been foreclosed upon, and plenty of the mortgage-backed securities stuck on companies' books are backed by loans on homes that still have people living in them. The government is not going to kick people out of their homes just because they are late on their mortgages.
Besides, the federal government has already allocated $4 billion to help local and state governments buy foreclosed properties in an effort to stabilize home prices. More details on that program are expected to be released today.
Observers also make this point: The problem is confidence on Wall Street, and buying vacant properties would not address that.
"It's not clear that the foreclosed real estate or even the mortgages still held on the banks' books will have the effect" of stabilizing the markets, said Ellen Seidman, a former director of the Office of Thrift Supervision. "Of course, it's not clear that buying up MBS will, either."
How will the government decide how much to pay for all these troubled assets?
Nobody knows, including Mr. Paulson. During the week, the Treasury secretary offered a tortured analysis to Sen. Robert Bennett, R-Utah, who tried to get at this question. Mr. Paulson ultimately said different prices would be paid for different kinds of assets and that these decisions would be made by asset managers the Treasury hires.
OK, so who are the asset managers going to be?
Like everything else about this plan, the answer is not clear, though some are already applying for the job.
A top official at Pimco, for example, said the bond fund manager would — for free — help the Treasury evaluate troubled assets.
Another big player in that market is BlackRock, which was hired by the Federal Reserve Bank of New York to evaluate Bear Stearns' assets when it was rescued this spring.
The government also could look within and hire the Federal Deposit Insurance Corp. The FDIC is already managing troubled mortgage assets held by failed banks, including IndyMac Bancorp. The agency also managed the now-defunct Resolution Trust Corp., which took assets of failed savings and loans and sold them to investors.
Lawmakers are very keen to get the FDIC involved because its chairman, Sheila Bair, has been the most vocal government voice in favor of loan modifications. They argue that, if the FDIC were to manage troubled assets, it could take a lead role in helping modify the underlying loans.
What about the firms selling assets to this facility? Will they pay a price?
Yes. The government may get warrants in these companies so that it can share in future profits. There are also likely to be some limits on executive pay.
But wouldn't that limit participation?
It could. Some bankers have privately said they won't participate if the restrictions are too onerous. Still, how the restrictions will be administered is likely to be left to the Treasury, which is unlikely to act in a way that makes its own plan fail.
But I thought financial firms were desperate; they have to participate.
Only a few really must participate. The key, according to regulators, is having enough healthy institutions participate so there is a healthy market for these troubled assets. The more banks that participate, the easier it will be for the Treasury to value the assets.
Is this plan going to work?
No one knows, but the consensus is broad that "something" must be done.
OK, what's next?
Look for Congress to pass a bill by early next week after a lot more hand-wringing and some presidential-candidate grandstanding. If the plan fails, it will be the next administration's problem. How either candidate would handle it is just one more unknown in a universe filled with them. But one thing is clear, we're all going to spend a lot of time next year talking about how to reform financial services regulation.
