The question now: Will it work?

ByABC News
September 29, 2008, 12:46 AM

— -- They met. They argued. They wheeled and dealed.

Now Congress has a tentative agreement on how to bail out the nation's financial system, and leaders are promising approval by midweek.

The $700 billion question: Will it work?

If all goes well, U.S. taxpayers will pour billions into shaky securities, many held at tottering financial institutions. Market demand for those securities has evaporated, as financial companies now deal with the fallout from bad bets during the housing run-up that ended two years ago. The government could recoup its money, if the market stabilizes and the government eventually can find buyers.

"In theory, it is an elegant answer to an immediate problem," says Mark Zandi, chief economist at Moody's Economy.com. "It'll settle the markets, quell the panic."

If all doesn't go well? The government will have wasted billions of dollars at a time when the money could have been put to better use elsewhere or saved. "This is too much money in too short a time going to too few people," with too many questions unanswered, says Rep. Dennis Kucinich, D-Ohio.

At the heart of the deal, reached in negotiations among congressional leaders and Treasury Secretary Henry Paulson over the weekend, is a promise to spend up to $700 billion to buy the toxic securities that are freezing the nation's banking system and threatening to cause a meltdown of the nation's financial system.

These securities, backed by questionable mortgages on overpriced properties, have plunged in value. In many cases, there aren't any buyers. In one of the few recent public sales of mortgage-backed securities, Merrill Lynch accepted about 22 cents on the dollar.

Commercial banks, investment banks, hedge funds and other financial institutions worldwide have seen huge losses from subprime securities and will see more if they have to dump their holdings on the market. Because of those losses, credit markets are paralyzed.

Many companies can't get loans at all, and even highly creditworthy firms have to pay much higher interest rates than usual on their loans. Ultimately, the credit crunch could force companies to shut down in a wave of defaults and bankruptcy, slamming the economy into a severe recession.

But some doubt even this premise, argued forcefully by Paulson and Federal Reserve Chairman Ben Bernanke in hearings on Capitol Hill last week. Rep. Ted Poe, R-Texas, for example, says he's worried that Congress, in backing the rescue bill, will be falling victim to scare tactics. "The Y2K scare was just a mythical hoax, and that's the way this is," Poe says, a reference to the unfounded fears that world computer systems would melt down on Jan. 1, 2000.