The details of the US mortgage bailout are starting to emerge. The draft legislation provides the the US treasury with additional authority to borrow $700 billion. Thes funds will then be used to buy worthless mortgage-backed securities that are now sitting on US bank balance sheets.
Two immediate thoughts come to mind. First, if history is any guide, and here I am thinking about the savings and loan crisis of the early 1990s, this $700 billion number is a starting price. It is the public finance equivalent of a teaser rate. Now that banks have an incentive to come clean, it is safe bet to assume that the they are going to own up to a far bigger problem than anyone previously realised. The US treasury will be flooded with nasty mortgage debt, and within a year or so, it wil come back to Congress looking for more cash. The final cost bourne by the US taxpayer will be at least $ 1 trillion, and could even be $1.5 trillion.
Second, mortgage debt was only the most high profile part of the banking crisis. US banks are holding other, equally compromised assets. Credit cards and auto loans are the two most intractable problems. Despite the shock market euphoria of Friday, US banks are still in deep trouble.
As time passes, and people begin to calm down from the hysteria of Paulson's bail out announcement, the same sorry concerns about US banks will resurface. This crisis is far from over. It has simply changed from being a purely banking crisis to a combination of a public finance and banking crisis.