Explain to me: Federal Bank Bailout

[asterroc]

Oh wise LJ-friends, explain to me this Feds bailing out / buying out the banks thing. Preferably in 3 sentences or less (so as to boil it down to what's most important).

I really do appreciate y'all's ability to boil down these topics I find remarkably complex and filled with too many details for me to grasp, into simple "here's what's important about the thing, and here's what you can ignore" sort of summaries. And I've a tag for them too.

So. Fannie May, Freddie Mac (what's with the names anyway?), and AIG. Three sentences. Go!

Comments

[(Anonymous)]

Restore confidence in the US housing market.
Prevent a domino effect.
Preserve livelihoods.

The govt isn't bailing them out per se though. It's lending AIG 85bn @ 11% interest and taking a 79.9% controlling stake in the company. The terms are just as bad for Fannie and Freddie. The hope is that over time the govt will recoup all of its investments, ala RTC (and what they're looking to establish now in congress with 700bn in capital) in the 1980s for fixing the Savings and Loan crisis.

Fannie Mae / Freddie Mac:
1. A lot of foreign institutions own their paper. If they dumped it, they'd probably start to unload other US paper (treasury bonds)...
2. Provide liquidity for loans / mortgages. Nobody was lending.
3. The two are govt sponsored... If the govt let it fail, the world would look unkindly on the US...

AIG (if it went into bankruptcy):
1. AIG is the largest insurer in the world
2. A lot of people wouldn't be able to cash in their insurance policies.
3. A lot of businesses would suddenly be exposed to liabilities because they're no longer insured (especially where things are required to be insured). This could potentially cause them to fail, potentially causing a domino effect.