Essentially, a lot of banks have debt that is failing in a big way, and the way that debt is structured makes it very difficult for them to reorganize it (when 19 institutions own part of a mortgage things get complex). And this has significant downstream ripples on other companies (which is why bad mortgages brought down AIG, an insurance company, earlier this week).
A lot of the problem here is the uncertainty as to just how bad it is going to be so nobody is willing to invest in entities heavily exposed to this debt.
So it looks like the government is saying they will step in and buy from the banks a huge portion of these bad mortgages. They'll do it at a significant discount but it creates certainty for the institutions. They can finally just write off actual losses and move on.
The government will then bear the risk of all these loans, but they can also be much more flexible in reorganizing them (of course, they might be too flexible) so while you'll hear numbers in the hundreds of billions as what the government will spend buying these loans that, in the end, won't be the final cost of them since most of the mortgages will eventually pay off and since the government will have purchased at a huge discount it could all prove ok in the end. Or the government could still take a bath.
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