What’s the problem on Wall Street?
Banks gave loans to people who couldn’t make payments. In order to make money, the banks sold the loans to other investors. As these borrowers rapidly began defaulting on their loans, each bank and investor ran out of money. As a result, banks do not have the required capital to make new loans, which puts the banks dangerously close to insolvency. Banks have not only slowed lending to individuals and businesses, they have stopped making loans to each other. The rescue plan should help restore confidence in financial markets.
What happened Sunday?
The Bush administration and key lawmakers agreed on a bailout plan for the growing number of failing banks. The plan is an altered version of the one suggested by Treasury Secretary Henry Paulson last week. Taxpayers will immediately give $250 billion to the Treasury Department to start buying up bad loans from banks. If needed, an additional $100 billion is available at the discretion of the president, and a final $350 billion is on the table, unless Congress resolves to take it back. The president has the authority to veto such a resolution.
Why should my tax dollars bailout rich guys on Wall Street?
Because if the banks collapse, it will be almost impossible to get a loan, which would essentially freeze the economy.
What’s next?
The plan goes to the House for a vote Monday, and is expected to pass the Senate on Wednesday.
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The Associated Press contributed to this report