Understanding the bailout

Some of you may remember in my last article, I went into detail about our current credit crisis. Describing subprime loans, tranches, derivatives and other exotic synthetic financial products felt more like writing fiction than fact. But it wasn't. It was all too true and now all these "weapons of mass financial destruction" are wreaking serious havoc on the global economy. Since we now understand the root cause of the problem, let's take this opportunity to look at the proposed solution.

The government rescue plan that failed to pass the House of Representatives on Monday, was sweetened and passed by the Senate on Wednesday. But if you are like me, having Congress paint broad strokes and say, trust me I have a plan, is not an option. I wanted to know what this "bailout bill" actually entailed since its passage is so important. So here it is as best I can describe. Remember, this is fact, not fiction.

The heart of the bill allows the Treasury to buy up troubled assets from financial institutions. These assets are all the mortgage-related products that were created so that people who could not qualify for a traditional mortgage could buy a home and all the people who wanted to make a buck from these unconventional mortgages could find a way. If the Treasury buys up these loans, the banks will in theory be able to make loans again. Debt is the grease that makes the wheels of business turn and that grease has all but dried up these days.

This makes it very difficult, if not impossible for businesses of any size to operate so unfreezing the credit markets is imperative. The number $700 billion has been thrown around as the target the Treasury needs to do the unfreezing. This would be done in stages. First $250 billion to get things moving again and another $100 billion if the president deems necessary. An additional $350 billion would still be provided if the president and Congress approve funding. Now unless you having been living on another planet, you know that a basic bill did not pass on Monday and the global stock and bond markets reacted violently.

So, what are these sweeteners I mentioned earlier that were added by the Senate in order to make this bill more palatable? They include a host of tax breaks, a temporary increase from $100,000 to $250,000 in FDIC limits to insure deposits and several more, how can I say this delicately, esoteric measures like requiring health insurance companies provide more mental health coverage and a proposed tax benefit for victims of the Exxon Valdez disaster. My favorite is a tax exemption for the makers of wooden arrows and I cannot forget to mention a tax break for makers of Puerto Rican rum that had recently expired. All very important to stave off economic disaster I would say.

All kidding aside, this bill also allows the government to insure instead of buying some of these troubled loans and establishes an oversight board. In addition, there is mention of limiting executive compensation - AKA the golden parachute - and amending the alternative minimum tax that snags as many as 20 million Americans per year. There is $8 billion in tax relief for victims of natural disasters and an extension until 2009 of above-the-line tax deductions for college tuition. Also covered is an extension of a property tax deduction for those who do not itemize and tax benefits for businesses that incur costs for research and development.

My article was written before this bill goes back to a vote in the House so I do not know the final chapter in this saga of greed gone wild. Now I may not understand how all of the sweeteners are going to get things back to normal. Let's face it, normal is now going to be much different than it used to be. Loose credit, bad lenders, greedy investors and a general lack of oversight and common sense that was normal over the past several years got us into this mess so perhaps a tax break on rum will get us back out. Pardon my sarcasm.

• The opinions expressed here of that of Carol Perry and may not reflect those of AWA Wealth Management, LPL, or the Nevada Appeal.