Why isn't the bailout a loan package instead of a grant?

[Ah Xoc Kin]

Is the bailout a grant program, and if so why
isn't it a series of easy-term loans instead?

By grant I mean
"A grant is a form of federal or state financial aid
that does not need to be repaid."

When I get into trouble I have to use a credit
card or get a loan. But when 'they' get into
trouble it looks like they get grants. I don't get it.

[On the Road]

1. It's Not a Grant

The US would buy mortgages backed by real estate for somewhat discounted prices. Ideally, the goal would be for the federal government to break even on the repayments, foreclosures, and eventual resale. The trick is valuing them.

If the companies go belly up, it's a much better arrangement than a normal loan.

[Ah Xoc Kin]

2. why would

"Ideally, the goal would be for the federal government to break even on the repayments, foreclosures, and eventual resale."

Why would someone buy debt/assets from the federal government
that caused catastrophic failure at every institution
that's held it?

[Igel]

3. "The trick is valuing them."

Currently there are lots of securities that are all but worthless, not because they don't provide an income stream or because they have no valid mortages backstopping them, but because nobody knows what their income stream or what the mortgages are worth. Moreover, given the problems in the housing market, it's possible that more mortages will sour, reducing their already unknown value by an uncertain amount. In other words, "toxic".

This means risk. If income for a security is fixed, greater risk will drive down the price of the security. Hence most of the problem, since most of these securities are marked to market.

Since a relatively small number of mortgages are in default, the securities are probably worth more than they're being traded at. There are two approaches to take: The first is to buy them at more than their current market price, hoping to do the "trick", to value them properly so that the income and resale value causes Treasury (or the FDIC) to break even. The second is to buy them at rock-bottom prices--it may make collapses more likely, weaken the fed, and possibly decrease overall liquidity, but then we'd have money to put into the Hope for Housing program, which is the real purpose of the bailout after all, right? (Wait, didn't tinkering with the CRA for precisely the same purpose help prime this problem? No matter. It's a different millennium, so no 20th century thinking allowed.)

[On the Road]

4. To Me, the Goal Would be

for the feds to help the banks by assuming risk while being made whole, or coming reasonably close.

I agree that valuing at fire-sale prices will make collapses more likely and IMO do not meet the goal of helping the banks survive.

All you need to know to set the valuation is the future rate of foreclosures, home prices, interest rates. Impossible to do accurately, but I like that the Democrats introduced a measure to make the banks pay up after a few years.

[On the Road]

5. The Mortgages Could, of Course, be Held to Maturity

but institutions have purchased trillions of dollars of mortgages in this decade. Right now, there's a lot of uncertainly, but once the economy and real estate prices stabilize, confidence returns, and the percentage of foreclosures becomes more predictable, buyers will return.

Some of the areas with the highest foreclosure rates now, like southern California and Florida, are being described as worthless junk. But they also have some of the highest long-term values in the country, and in the long term there is a tremendous amount of value there.

[SouthToTheLeft]

6. Loan, not a grant.

As far as I'm aware, it is a loan — not a grant.