Guess who is starting this debate. The fat cats on Wall Street, who support the $700 billion welfare programfor the big financial institutions (this may help out WallStreet) that are the root cause of the present crisis.They are being helped out of the toilet for their bad decisions.

The debate is in response to that part of President Obama’s Stimulus package, the $75 billion aid to homeowners segment. Wow, $75 billion in aid to themillions of financially troubled homeowners; $700 billion to a few hundred troubled financial institutions.

You do the math. Is there something wrong with this picture? Yep.

1. The financial mess worsened in 2007 and 2008. Mortgages are debts to us, but they are assets to the financial institutions holding them. And they are required to revalue their assets frequently. Since homeowners were defaulting, not paying, on their sub prime option pay mortgages in growing numbers, banks were forced to reduce the value of their assets, and the reductions were becoming significant.

2. Now the investors in collateral backed debt obligations (CDOs) were finding that their investments were in trouble, and they could not sell these hugh packages of mortgages. Nobody wanted to buy them, so our debt markets were in trouble.

3. Bank write down of assets began to turn into a tidal wave of losses, as banks wrote off billions of dollars of bad debts (sub prime mortgages) – the bank’s assets.

4. As the crisis worsened, some of the first big financial institutions to go bankrupt were very large investment banks, who were big investors in CDOs, companies, like Bear Stears, and Lehman Brothers. Bank of America, in trouble itself and receiving massive bailout funds, bought up the failing investment bank of Merrill Lynch. Wells Fargo bank, another big bank receiving massive bailout funds, used some of the money to buy up failing Wachovia bank. These buyouts, with federal bailout funds, really helped us guys & gals. Hmm, not really.

5. Banks were also failing, such as IndyMac in California, one of the first to go, who had been a large sub prime mortgage lender. And there were, and are many more to come.

6. Then AIG the largest global insurance company emerged as Washington’s largest private sector bailout. The U.S. Treasury and the Federal Reserve provided over $150 billion in loans and cash, getting an 80% stake in the company. Again, it was the sub prime mortgages that did them in, as they rapidly approached bankruptcy.

7. With about $5.5 trillion in mortgages guaranteed by them, Fannie May and Freddie Mac became liabilities of the crisis, and had to be taken over by the Federal government, who now guarantees these mortgages. I think that means us guys & gals are the guarantors.

8. While all this was going on in the credit markets, commodity prices were skyrocketing, as we all know from the price of gasoline at the pump in the spring and summer of 2008. It was all basic raw materials, including coal, copper, iron ore, and steel, whose prices were doubling and more, driven up by hugh demands from emerging Asian nations. This has changed dramatically, however, as the price of crude oil has sunk from $150 per gallon to under $40 now. But this reflects the world-wide nature of the crisis in the financial markets, and now the world’s economies.

9. With all the turmoil in the financial markets, banks have cut way back on lending, even with the billions of dollars of Federal bailout welfare. They want to protect their assets and balance sheets with this massive cash injection. Too bad for business, especially small business, us guys & gals too, who need to borrow short term for payrolls, inventories and survival. So, thanks again to our banking system, we will lose many small businesses unable to survive in a declining economy without credit funds.

10. There has been a run on money market funds, depleting their assets so that they can no longer invest in business credit securities, simply making it even more difficult for business to acquire credit funds for their operations.

To see where we stand now, in late February, 2009, and a proposed solution, check out my Layman’s Primer Part 3.