Stuff You Should Know - How the Bailout Works

Episode Date: October 21, 2008

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There's something beyond our understanding going on here. Starring Supernatural's Misha Collins, The Walking Dead's Melissa Ponzio, and Rogue One's Alan Tudyk. Written by Lauren Shippen and created by me, Erin Mankey. Listen to Bridgewater on the iHeart radio app or wherever you get your podcasts. Brought to you by the reinvented 2012 Camry. It's ready, are you? Welcome to Stuff You Should Know, from HowStuffWorks.com. This podcast is brought to you by Audible.com, the internet's leading provider of spoken word entertainment. Get a free audio book download of your choice when you sign up today. Log on to audiblepodcast.com slash stuff today for details. Hey, welcome to the podcast. I'm Josh. This is Chuck.

Nothing. I'm here. All right. Sorry. Chuck is here. I want to keep it everyone in suspense. Yeah. Is Chuck here? Yeah. Well, we need to wear the violins. Chuck, you watch Criminal Minds? I don't. Do you watch Private Practice? I don't. Biggest Loser? No. What about, okay, this is the fourth and last network. What about Till Death? I never even heard of it. Okay. How much comedy? So much cartoons. Well, Till Death is comedy, but sorry. Had you watched any of these shows? Had you been a big fan? On Wednesday, September 24th, you would have been very upset. Because they were all preempted, I bet. They were all preempted. Already, you're well aware that the economy is in the toilet. It is. And all you want to do is sit

back and watch your favorite celebrities lose weight or watch Brad Garrett, you know, tussle verbally with his wife or, you know, whatever Private Practice does. I'm not fully aware. Right. Practicing private things. Exactly. You want to escape through these. And all of a sudden, here's George Bush laying it out there. This is a president who's avoided using the word recession in public. And all of a sudden, he's basically white knuckling the podium with the presidential seal in front. Right. Saying, we're all going to die. Maybe he just wanted to skip straight to depression just for kicks. I guess, you know. Avoid recession. Avoid recession, go right to depression. I don't know that he used the word depression. No, of course not. But he

may as well have. Right. It was bad. He said our entire economy is in danger. It was one quote from that very, you know, great address, unusual writer. He doesn't usually do this kind of thing. Right. I think he should have followed that sentence up immediately with good luck to whoever's coming next. Exactly. Yeah. Yeah. So long and good luck or whatever. Right. Yeah. So this is kind of a big deal. And I think Bush addressing on a Thursday for no other reason than to tell Americans that the economy is in danger. It kind of really made it a bigger point. And the reason he went on was because he was trying to garner public opinion for the Paulson plan. Right. Also known as the $700 billion bailout. Yeah. AKA just the bailout. I think people are calling it bailouts. Yeah.

That's the word on the street. It is. And it's not hyphenated for our listeners. It's not two words. It's one word. This is this is AP right here. Okay. Not us. So he's on there. He's talking about the bailout. Why would he care? Why would he care what Americans think? I'll tell you why, Chuck. You didn't even let me answer. But yeah, he has earlier that week, it looked like Congress was going to pass it. Everybody was patting one another on the back for bipartisanship. You remember? Oh, yeah. Look, how's Senate, Democrat, Republican, the leaders are saying we're passing this, right? Yeah. And it starts to go into the house and they bring it to a vote. And all of a sudden these rank and file Republican stages revolt and they're like, Hey, how about

this? We've got another plan and it's nothing like yours. Right. So ultimately the house defeats the bill. Sure. 228 to 205. Something like that. Yeah. I think it was exactly that. Two are really good. It's right in front of me. A memory like a bear trap there, Chuck. Okay. So the house defeats the bill. It looks like it's sunk. There's people, you know, screaming in terror, dogs and cats living together, mass hysteria, right? And Bush has already played his one ace in the hole by addressing the nation. The only thing next he could do would be like to kneecap somebody, maybe a figure skater on public television to get our attention. Right. Who would do that though? I don't know. Terrible. Terrible. So it looks like the bill's

defeated and all of a sudden here comes the Senate. Right. On the white horse. Exactly. You know, the house is usually kind of the congressional body that's known for shouting down things and, you know, trying things on the sly. The Senate's supposed to be wise and sedate and calm. Right. And all of a sudden they're taking up a failed house bill, basically. Right. Sweetening it. Like they attached a very popular mental health bill. Did you know that now healthcare providers have to treat mental health like they treat physical maladies? Well, that's good. Yeah. It is good, which is one of the reasons why they put it in this bill. Right. So it would pass. There's also a lot of pork in there though. There is.

Manufacturers of wooden arrows that I think Boy Scouts favor get some subsidies out of that. Yeah. And then there's the extension of expiring tax breaks for the wealthy. Right. Although there's also some tax relief for the middle class, new tax relief in there. Right. And I know the one important thing they did was raise the FDIC's insurance coverage for people's bank accounts. Yeah, which is huge because banks like Wacovia and Washington Mutual are going under. Right. And I mean, these are neighborhood branch commercial banks where you keep your money. And all of a sudden, oh wait, the bank's front door is locked. Right. And you know, 2 p.m. on a Tuesday. I was one of them. Really? Not one of the banks, but one of those

institutions. I'm not going to divulge too much, but yeah. I was worried there for a little while. That's good. Well, I'm not going to name my bank either, but I'm very confident in it. Recently purchased countrywide among other things. So I'm feeling pretty good about my bank. Which is your under your mattress. Let me knock on wood there. Yeah. I don't want to tempt the gods. So, okay. The Senate takes up the bill and they add the sweeteners and they cough up Senate Amendment 5685, which is the Paulson plan with the mental health bill, the FDIC increase. Paulson plan plus is what I like to call it. That's a great name for it. You should have called it that this is the same day. They passed it the same day that they took this up. Right.

Right. The Congress never acts this fast. Even more amazing. Two days later, the house gets it. That day, they pass it. I think they passed it at like 1230 and they started deliberating on it at 10 in the morning. They passed it two and a half hours later. Yeah. I wondered when it happened, if no one really knows this probably, but if it was the sweeteners actually, or if the house kind of ended up with some egg on their face with the first vote and realized that everyone was really freaked out by the fact that they defeated it. Well, I think number one, I think Bush's address actually did have a real impact. I watched a lot of CNN. I actually watched CNN live as the house was voting on this amendment. And there were a lot of congressmen who

are congresspeople who said that they switched their vote because the calls that they were getting from their office changed from, you know, I don't like this bailout package to, you've got to vote for this bailout package. Right. And that actually changed votes. And you can probably directly link that to Bush, you know, looking very tired and haggard and scared on, you know, Wednesday, September 24th. Right. So I think that's one of the reasons why the house actually passed. You know, my uncle's a former congressman. I should give him a call and see what he thinks about the whole thing. Where is he from? Yeah. He was a congressman in Tennessee two or three terms, I think. That's great. Yeah. Good for him. Okay. So it passes, right? Right.

And it's actually no longer a $700 billion bailout. The bailout $700 billion. But this bill actually hiked it up to an $810 billion bill. Did you know that? You know, I didn't know that. All that, all that. What's an extra $110 billion. Yeah. Like it matters. Right. And the weird thing is, is taxes these days, you don't, you don't really feel a pinch. Like you think about the government shelling out $700 billion. How, how, how are we going to feel that pinch? Right. And you know, actually for every American that's, I think $2,300 a person, really, every American, taxpayer or non. So we're going to feel a pinch somewhere. Right. Or are we? Let's get into this bill, Chuck. Okay. Let's get into the meat of it. Let's do it. So you want to, you want to

lead off with what are some of the things that are inside? I see by you bearing your teeth. Are you, are you cool? Well, no, I know that it's, that one of the things they signed off one was an immediate $350 billion. They kind of did it in stages, which I'm not a, I'm no economist, but it seems to be kind of the smarter way to go. Yeah. $350 billion upfront and taxpayer money. And then the new, newly created office of financial stability, which we hope it ends up living up to its name. Another $350, I'm sorry, another $100 billion after that. And then another $250 after that. But both of those need approval by Congress. Yeah. And I think the, the first one, the $100 billion has to get approval from the house. And the second $250 billion is, is contingent upon

Senate approval, I think, but either way, yeah, Congress has to approve these and they have to, they'll approve them if this whole thing's working. Right. I don't see them saying no, though. No, I don't either. I mean, I think in for $350 billion and in for $350 billion. Right. Plus, it would be, it would kind of be a sign that, hey, we did the wrong thing by allowing this first $350 billion. So I don't think they would do that either. Yeah, I agree. Time will tell. I agree. So like you said, this, this bill establishes a brand new office. We're going to have a brand new office. Right. Like you said, the Office of Financial Stability. And this is led by the Treasury Secretary, not necessarily Henry Paulson, but whoever is the,

Well, they just named actually yesterday, the new bailout chief. Oh, really? Who? Yeah, you don't even know this. No, this is breaking news. Yeah, his name is Neil Kosh, Kosh Karai. And this guy is 35 years old. Holy cow. Yeah. And he's going to be in charge of doling out the cash. He's overseeing the Office of Financial Stability. He was previously a vice president at Goldman Sachs. And before his career in finance, he developed technology for NASA space missions. So this guy was clearly doing things in college that I wasn't doing. Yeah, 35. That's not a very long existence. He seems to be a sharp guy. Okay. So we have a brand new czar of economic stability, I guess. Yeah, fresh, fresh meat.

And what this, oh, I'll bet you he ages 20 years over the next six months. Yeah. Yeah. So basically, what this guy's going to be in charge of essentially is buying up terrible investments that, that, you know, banks and investment banks and other kinds of firms have on their hands. What a weird job. It is a weird job. It's never been done before, as far as I know. Basically, there's certain types of investments that can be bought and all of them are related to mortgages. You've got like mortgage backed securities. I think collateral debt obligations would be purchased under this and mortgages themselves, which I thought was kind of cool. Yeah. Because this is actually one way that it could directly benefit a homeowner. One of the

provisions in this act is that when this guy, what's his name again? Neil Kashkari or Kashkari, I'm not sure you pronounce it. Let's call him Kashkari. Okay. When Kashkari is negotiating with these investment banks and other people to purchase their bad securities, he's going to try to force down their throat restructuring of the mortgages. Right. The Hope for Homeowners Act. Yeah. No, the big problem with that and what it is is it's basically congressional support for restructuring loans, knocking down the principal, which is pretty radical. You borrow $400,000 for a house, you can't afford it, and all of a sudden, oh, we're just going to pretend like you only borrow $200,000. That's huge. The thing is, it's a voluntary program. I think you probably get tax

rebates or write-offs if you're a company or a lender that engages in this, but you can't force anybody to do it. Right. If the U.S. government actually owns your mortgage, chances are they're going to be very hesitant about foreclosing on you. Oh, yeah. Number one, that's just a huge pain. Right. But number two, they actually have a vested interest then to keep you in your house. Right. Okay. The reason being, if they can stem the tide of foreclosures, then the market starts to come back up, and these mortgage-backed securities and mortgages themselves increase in value. Yeah. All of a sudden, they're worth more and the plan works. Right. So if the government buys your mortgage, you should probably thank your lucky stars. Right. Then this is all theoretical.

None of it's been put into practice yet. Right. Which is, I think, why a lot of people are kind of nervous about this bailout. Right. I know I am. I do know that foreclosures actually nobody wins in foreclosure. It's not like, because I did some research, I wrote an article on it last year, and it's not like banks foreclose on people, and they're just, we kick you out of the house. Banks lose money too. Sure. But like we've mentioned before, the mortgage-backed securities, sometimes the banks don't even own that house. They turn around and sell it to securities, and it gets fractured off. And so maybe that's kind of where the problem started. Well, you know who does win in a foreclosure. Someone who's renting right now. Right. If you are a renter and you

don't buy in this climate, you're a total sucker. Yeah. It's probably a good time to buy. Oh, it's an excellent time to buy. It's like a fire sale out there. I've said it before. I'll say it again. Right. Get your act together, buddy. Get in a house. Yeah. Thanks. Okay. So it's not the only thing that this Kashkari is going to be doing. This guy's got a lot of responsibility. I'm not sure he knows what he's getting into. And frankly, I have to say, I find it a little fishy that Henry Paulson is one of the former high-level executive at Goldman Sachs, and he taps this guy. From Goldman Sachs. Yeah. And you could say, well, he knows him. He's worked with them. He respects them. But I believe he already worked with them. I know that I like one investment bank being so

entrenched in this bailout. Actually, I think he actually worked in the office, in the treasury office. He was previously with Goldman Sachs. But you know, I know what you mean. I got you. His influence. Is he like Paulson's protege or something? I don't know. Maybe. Kashkari. Yeah. Okay. So there's other things that Kashkari is going to be in charge of. When the government purchases $300 million or more of bad investments from a lender, whoever, they automatically take a warrant in your company. Right. This is a non-voting block of shares. Just common stock shares. Right. And this is actually really ingenious, Chuck. You want to tell everybody why? Well, I don't know why. Let me tell you why. All right. You're the

econ master. This is straight from Kashkari to me to you. Okay. Actually, that's not true at all. We should probably cut that part out. The reason why it's such an ingenious provision is because no one has any idea how to value these mortgage backed securities. Right. I read an article with a guy who was like this expert at valuing a stock that you found in like your grandfather's closet from 1923 or something. This guy could value it. This guy and everyone else is totally lost at properly valuing mortgage backed securities and CDOs and just all these other bad investments. Right. So whatever the government, whatever price the government sets to buy these at, it could be way too low. Right. So if you are a company selling this to the government and you end

up experiencing a windfall profit from the sale, which you're not supposed to be, the government's covered on the backside because they own shares in your company now. Right. So if you experience a profit, your price per share rises and the government gets something out of it because they own those shares. Right. And in theory, ultimately the taxpayer, it would come back to us. I'm not holding their breath, but what we want is for this bailout to work. Yeah. And technically it could work. I mean, if you think about it, right, if the government buys up $700 billion worth of mortgage backed securities or mortgages, whatever, and all of a sudden the market stabilizes because of it. And maybe over the course of a couple of years, maybe a decade,

who knows, the market comes back into full swing. These things don't just disappear. They don't just vanish. The government's not going to take these securities and throw them in a furnace. They're going to sit on them basically. Sure. I think as Bush put it, the US government's the only institution large enough to buy these and sit on them for a while. Right. And then once the market rises, these things increase in value. When the government sells them and if they sell them well and not flood the market with these things, then we should, as taxpayers, see a wind fall from that. Right. I mean, if the combined value of all these things doubled and not all of them are worthless, there are some good mortgage backed securities out there still, but they just

have a bad name and no one wants them. Right. When they increase in value, I mean, even if they double, that's $1.4 trillion from the sale and half of that being pure profit. That'd be pretty good. It would. Whether that happens or not, it remains to be seen. Right. You know what I think would be interesting is if all of a sudden they put out this big plan, Bush says, we're the only people institution big enough to do this and all of a sudden Bill Gates and Warren Buffett stroll up behind him and say, not so fast. We've got our own plan and they just bought up $800 billion worth of bad investments. Well, Warren Buffett's been on a buying spree right now. Of course he is. It's not just a good time to buy a house or foreclosed house. It's a good time to buy

stocks. Yeah. So again, it's like fire sale out there. It's crazy. But yeah, apparently from what I understand from watching the recent second presidential debate is that Obama may tap Warren Buffett for Treasury Secretary. You know, I would be all for it. It makes a lot of sense. Sure. Yeah. Yeah. So anything else in this provision, maybe of the Golden Parachute? Yeah. That's the one thing that I know probably made a lot of people feel a little bit better is the gold, the famous Golden Parachute. A lot of times when companies go under like the big Enron thing, you remember the executives are the ones that come out on top and the investors lose all their money. These executives get these huge payouts at the end and just kind of sneak out the backdoor and buy their

island and Bermuda. And I know this calls for no Golden Parachutes. These big multi-million dollar severance packages are not going to happen. No. And specifically, your top five executives, any salary over 500 grand can't be deducted as an expense. Right. So that in theory should limit companies from doing it. There's some problems with that though. What's that? That's just your top five executives. Right. Sure. Another problem with it is that the cap, there's already a cap that exists, but it's at one million. You can't deduct any salary over one million. So really, for a major company, all it's going to be is 2.5 million and lost deductions, which is nothing. Right. Second problem. The other problem, this is the biggest problem. There is no provision

in the Golden Parachute Clause of this law, the bailout bill, that says anything about stock options. Exactly. So think about it. You let an outgoing CEO go. You're like, you did a terrible job managing, but here, take all these stock options. Right. And we're going to value them at today's terrible market price. Right. Just hold off a couple of years. The market's going to come back and you cash in your options and you're just richer than an astronaut. Right. I'm glad you said that because I didn't even know that, but that's what I was just about to say is the way these guys operate. I had a feeling there's always some back door where they get theirs. Yeah. And they will. There's not going to be any way of going around it. The only thing I think

that we can hope for is that there should be widespread investigation and probably, you know, criminal lawsuits against a lot of the people who are running the show. Yeah. I think this will be under the microscope more than other little quieter bills that go through. So I think so too. So if you want to know anything more about this, I would strongly recommend you exercise your civic duty and read how will the government spend the $700 billion bailout funds on howstuffworks.com and stick around to find out one more reason why you shouldn't wear a Bluetooth headset. But first, Chuck, a message from our sponsor. The war on drugs is the excuse our government uses to get away with absolutely insane stuff.

Stuff that will piss you off. The property is guilty. Exactly. And it starts as guilty. It starts as guilty. The cops. Are they just like looting? Are they just like pillaging? They just have way better names for what they call like what we would call a jackmove or being robbed. They call civil acid. Be sure to listen to the war on drugs on the iHeart radio app, Apple podcast or wherever you get your podcast. There is no need for the outside world because we are removed from it and apart from it and in our own universe. On the new podcast, The Turning, Room of Mirrors, we look beneath the delicate veneer of American ballet and the culture formed by its most influential figure, George Balanchine. There are not very many of us that actually grew up with

Balanchine. It was like I grew up with Mozart. He could do no wrong. Like he was a god. But what was the cost for the dancers who brought these ballets to life? Were the lines between the professional and the personal or hazy and often crossed? He used to say, what are you looking at, dear? You can't see you. Only I can see you. Most people in the ballet world are more interested in their experience of watching it than in a dancer's experience of executing it. Listen to The Turning, Room of Mirrors on the iHeart radio app, Apple podcasts or wherever you get your podcasts. Josh, what's the first reason that you shouldn't wear a Bluetooth headset? I know you don't like the way. Awkward fashion look. I'm just gonna say it's my personal opinion.

I know a lot of people like them. Well, your style right out of the preppy handbook, if I may say so. I do my best. Which is good. That's a good look. My sister used to have that when I was growing up. Yeah, me too. Yeah, did you really? Yeah, I used to read it on the John. It's very cool. It's a cool book if I remember correctly. She also had how to speak like a ballet girl, I think. Yeah, let's skip that one for sure. Yeah, that's probably for the best. So yeah, the name of the article is How Bluetooth Surveillance Works. And apparently, if you wear these things, people know where you are. So how, Chuck? Well, if you have a Bluetooth headset and you have it turned on, from my understanding, you can get blue jacked.

Is that right? Blue jacking. Yeah, blue jacking is the term. And it emits a signal and people, other people, Bluetooth can actually tell where you are. So if you're into privacy. Yeah. If you're into privacy, make sure you read how Bluetooth surveillance works on howstuffworks.com. For more on this and thousands of other topics, visit howstuffworks.com. Let us know what you think. Send an email to podcast at howstuffworks.com. Brought to you by the reinvented 2012 Camry. It's ready. Are you attention bachelor nation? He's back. The host of some of America's most dramatic TV moments returns with the most dramatic podcast ever with Chris Harrison. During two decades in reality TV, Chris saw it all. And now

he's telling all it's going to be difficult at times. It'll be funny. We'll push the envelope. We have a lot to talk about. Listen to the most dramatic podcast ever with Chris Harrison on the iHeart Radio app, Apple podcasts or wherever you get your podcasts. Bridgewater, the hit fiction podcast is back. A supernatural thriller presented in immersive 3D binaural audio. The Bridgewater Triangle. There is some kind of mystical force in this region that attracts monsters and paranormal activity. There's something beyond our understanding going on here. Starring Supernatural's Misha Collins, The Walking Dead's Melissa Ponzio, and Rogue One's Alan Tudyk. Written by Lauren Shippen and created by me, Aaron Mankey.

Listen to Bridgewater on the iHeart Radio app or wherever you get your podcasts.