Bailout? This may sound like a stupid question.

[gooey]

But why not just give the money to the shareholders instead of trying to keep the corporations themselves afloat? Wouldn't that be justice?

[AllentownJake]

1. Debt holders

Have first claim on assets in bankruptcy.

[gooey]

2. I understand that.

But shouldn't the rules change if fraud and deceit is involved?

[AllentownJake]

3. can't change laws after the fact

unconstitutional. If something was legal at the time the act occurred you can't rewrite laws to make it illegal. There is a term for it but I forget what it was. England used to do this to the colonist so they banned the practice.

[Fla_Democrat]

6. Ex post facto

http://wiki.answers.com/Q/Does_the_constitution_allow_expo_facto_laws

Ex post facto
Latin for "from a thing done afterward." Ex post facto is most typically used to refer to a law that applies retroactively, thereby criminalizing conduct that was legal when originally performed. Two clauses in the US Constitution prohibit ex post facto laws: Art 1, § 9 and Art. 1 § 10. see, e.g. Collins v. Youngblood 497 US 37 (1990) and California Dep't of Corrections v. Morales 514 US 499 (1995).
http://www.law.cornell.edu/lexicon/ex_post_facto.htm

[NoUsername]

4. Or the little guy.

Alternet recently posted an interview with Nomi Prins, the author of "It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals From Washington to Wall Street". Here's a snippet:

"NP: Neither the crisis, nor the bailout was about the little guy. Former Treasury Secretary Henry Paulson was explicit in stating several times, and in several ways, that the government should not be bailing out homeowners who got in over their heads. And true to those sentiments, it didn't. Instead, amidst trillions of dollars of subsidies to the industry were made available in the most original and creative of ways, and no heed was paid the jointly humane and economical solution which would have been to find ways to restructure personal mortgages and loans, as opposed to dumping buckets of money over the top layers of the financial community and promising it would somehow trickle down and loosen credit for the "little guy."

The people that blame the Community Reinvestment Act for the avalanche of predatory lending are missing the true numbers that represent the situation. Only $1.4 trillion worth of subprime loans were extended between 2002 and 2007. On the back of those loans, the industry created $14 trillion worth of various types of assets and borrowed up to 10 times that amount using those new assets as collateral.

If the government had wanted to help homeowners and contain the costs of the bailout, it could have subsidized underwater mortgages directly at the loan level, or made it mandatory for banks to renegotiate credit terms or mortgage balances with individuals, as opposed to making it a mild suggestion that the banks have no incentive to follow.

For the money spent on subsidizing the industry, the government could have bought out every single outstanding mortgage in the country. Plus, every student loan and everyone's health insurance. And on top of that, still have trillions of dollars left over."

Much more at http://www.alternet.org/story/143573/

Definitely worth reading IMHO.

[MannyGoldstein]

5. Actually, You Want The Opposite

The shareholders own the bank and are responsible for its success or failure. If it fails, it's because they screwed up, and they deserve to lose their money.

However, if banks start to fail, then there are all sorts of dangers for the rest of the world. So it's best to let the shareholders fail, but to keep the bank running. This is typically done by the bank being taken over by the government. However, in the case of the Paulson/Summers/Geithner banker bailout, the government chose to keep the banks open in a way that kept the shareholders and management of the failed banks rolling in dough.

You and me, on the other hand - all we get is a stern finger-waving lecture on personal responsibility.

[gooey]

7. A lesson learned I guess.

A tough one. But a lesson nonetheless.

But let me ask this. What would have happened if we had let the banks fail? What problem(s) did the bailout prevent?

And I guess more importantly what problem(s) have they and/or will they cause?

[MannyGoldstein]

8. One problem is a run on the banks

Banks only need to have something like 1/10 of the money they have in deposits on hand - the rest can be loaned out, as it's assumed that everyone won't want their deposits back at once. When the money is loaned out, the bank theoretically still has it (they are owed it), but they can't give it back if someone asks for it. If depositors *decide* (rightly or wrongly) that a bank is insolvent - that is, that it owes more to depositors than it has in cash plus what it's owed - the depositors tend to try to grab their money all at the same time. But, even if the bank is "good" for the money, it only holds 1/10 or so of it in cash that can be returned, so the bank quickly is depleted of cash, and has to close. And when one bank closes, depositors at other banks start thinking "gee, what if *my* bank closes and I can't get my money?", and they run for their money. It's a domino effect, and it causes all commerce to freeze.

This is what was happening when FDR took office. He had to close *all* the banks temporarily, then open them one by one as the government could audit them and assure depositors that their money was safe.

The fundamental issue is that modern economic society assumes that banks are functioning properly. When they screw up, everything goes to Hell in a handbasket, and fast. But the bank owners should pay for the mess, not the taxpayers. Under the Paulson/Summers/Geithner plan, the taxpayers are paying most of the price - it's awful.