The problem here is that the mortgage backed securities are held by tons of banks and businesses and are used as collateral for loans taken from each other. Today they have no way to value, according to GAAP (Generally Accepted Accounting Principles) rules, so they must report the value as $0. This means they are now in default of their loan covenants and must repay the money or go bankrupt. Hence we’re going to set off a dominoe affect of banks failing. according to numbers i’ve read various articles for every $1 in loan losses, the amount of credit available in the US banking system declines by $18, so $700 billion or about 1 year of US economic output. No credit for cars, credit cards, mortgages etc.
The reality is that these Mortgage Back securities are worth more than $0. Not all people will default, especially if the crisis ends and the economy begins to grow. so the gov. could potentially buy the current debt for less than it will be worth in a few years and not only not lose money, but even profit.
One other idea, besides a bailout: Have Government declare that the reported value of these securites is “35% of original price”, instead of 0%, for a temporary period (i’d say 12-24 months) in violation of GAAP rules. This will keep their balance sheets showing assets until a market price is established, thus preventing loan defaults.