That's an aspect not much discussed. The bailout in essence is a trade (into the market) of AAA rated (currently) treasury bonds for devalued mortgage backed securities, a.k.a junk bonds. The fed will be buying the junk at the original value of the bond, even though market rates for these junk bonds is much lower. Merrill Lynch went under because they were forced to sell $30B in these junk bonds at $.22 on the dollar.
My fear with this bailout is that we are in essence opening up another case of Vodka at the AA meeting. Will these jackals just take the $700B and wind it all up in a bunch of derivatives and credit default swaps in one last orgy of personal greed? Or, will this money backstop the losses until the existing bad debt can be flushed out of the system?
The big boys want this bailout to get their stocks up to what they were before the "crisis", so they can cash out at the top, leaving the little people holding the bag again.
The problem is not a few mortgages here and there sprinkled around for affirmative action's sake, it is the Ponzi scheme of derivatives that they've been skimming off the top for years. It's also the fact that American business has lived like government--off of credit, rather than earnings, like responsible American families have. We have ways to deal with an economic downturn now that we did not have in the Great Depression days. We will go back to bartering where possible, and we will rebuild our economy on solid fundamentals, rather than on fairy dust.
Even if this bailout worked as perfectly as Paulson and Bernanke are hallucinating it will, it just puts off the day of reckoning until the Medicare system goes broke, or when the Social Security funny-money securities have to be paid.