Bailout 5: How the House of Cards Began to Tumble

According to some new information, Wells Fargo analysts and others have come to conclude that Wachovia's mortgage-based securities are probably worth 85¢ on the dollar, with a few of the worst ones worth 74¢ on the dollar. That is lower than earlier estimates that I had read, but not so low as the market was pricing them. No wonder Wells Fargo was willing to pay much more than Citigroup had offered to buy out Wachovia. I reiterate that the mortgage losses in real dollars are not nearly so bad as what the market would make it seem. Citigroup was very angry that someone called them on their extreme low-ball offer and sued Wells Fargo. Now they are fighting it out over who buys Wachovia. If the market stabilizes, who knows if someone else will even offer a better price.

On the other hand, the market in loans between banks and in commercial paper (short-term loans to large businesses to keep their cash flowing day to day) got into a serious crisis over the past months and weeks. I got a tip to listen to an outstanding description of just why this crisis came to be seen as so serious. I was surprised to find out that it was on the public radio program This American Life, usually known more for its quirkiness than for hard-hitting financial reporting. I don't mean they never tackle hard topics--their work on school reform is also some of the best I have ever heard. So if you have about an hour to listen and learn, you won't be disappointed by listening to Another Frightening Show About the Economy. If you want to dig a little deeper, another hour will allow you to hear about the housing bubble and unorthodox mortgage practices which laid the groundwork for this recent crisis in the show called The Giant Pool of Money.

Finally, the point that the people of the U. S. who are being asked to bail out these businesses need to get a share of the profit from their recovery. Another Frightening Show will explain the idea of making sure the government takes an ownership share through preferred stock in whatever companies it bails out. A growing swell of voices are asking for this. It is written as an option into the bill that Congress finally passed, but not because Paulson or Bush were advocating it. So if you want to know what to say to your representatives and senators, then ask them to support this way of dealing with the money our taxes will make available. Here is how one economist describes it.