The Big Bank Bailout: Are You Next?

They've saved the bankers, but what about the butchers, the bakers, the autoworkers and their dented 401(k) savings? Who's going to bail out the retailers, restaurants and manufacturers small and large? The government has committed $250 billion to rehydrate the balance sheets of the nation's leading banks and get lending flowing again. But if you're not exactly feeling reassured, there's good reason. With the global financial system wobbling, policymakers don't have many ways to stop the rest of the economy from heading for a recession. The challenge now is to try to contain it.

As banks have slammed on the lending brakes because they have lost so much money on subprime mortgages and securities tied to real estate, the entire $14 trillion U.S. economy is piling up behind them. Tighter lending means fewer firms can expand their business; cities can't sell bonds to build schools and sewer systems.

And regular investors--long advised to buy stocks, diversify and stay patient--are taking the beating. Anna Weiss, 67, of Houston embodies the anxiety now taking hold across the country. "I saved for 30 years. I have saved and saved and saved so that I could afford some of the nice things that I never allowed myself when I was young," says the retired retail manager. "Now I find because of other people's stupidity that the money I have saved has shrunk."

Why Paulson Changed Plans

The damage had been mounting so swiftly that in the midst of a global stock-market rout that ate 18% of the Dow, Treasury Secretary Hank Paulson was forced to import a plan he once considered practically un-American. Paralleling a program authored by U.K. Prime Minister Gordon Brown, it called for the U.S. government to take partial ownership of nine leading banks and offer to buy pieces of hundreds of others. On Oct. 13, the nine bank bosses, assembled in the Treasury's imposing boardroom, were each handed a piece of paper with the terms: $25 billion of preferred shares each from Citigroup, JPMorgan Chase, Wells Fargo and Bank of America. In return for the capital, the U.S. would collect a 5% dividend in the first five years. Although Wells Fargo chairman Richard Kovacevich resisted, Paulson gave the bankers no choice. It's partial nationalization, although in announcing the bailout Oct. 14, Paulson deliberately avoided using that term. "Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence in our financial system," he said.