Why are they being bailed out?

The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability. The ideas is that this program will address the root cause of our financial system's stresses by removing distressed assets from the financial system.

What are the distressed assets going to be ... the things that your bank's banker invested in, and these are primarily composed of securities backed by what you and others thought you merely owed to your bank.

How did it get this far?

Well you got a loan from a bank or mortgage company. Your loan was sold, so now you owed someone else. Now this bank, let's call it "Freddie," although it could be one of many different banks has dozens, if not hundreds of these loans they have bought. But Freddie want s to make more money than they can by just waiting for you to pay interest, so they bundle your loan, along with several more and create something they call a "mortgage backed security."
Hoo boy, it gets better.

Now that they've created this really sound investment (Okay, I'm kidding.), they sell shares of this package to other investors. So now, instead of owning a loan that may be good, or may be bad, someone owns a part of a whole bunch of loans where some may be good and some may be bad.

Now comes the good part. Putting a current market value on the package.
Well, normally you would think that is simple, right? What are the odds of each loan being good or bad, multiplied by the face value of that particular loan and then all those projected values added up to create the value of the package.

Uh uh. Not so fast. Step back a bit and look at what you've got. You've got a bundle of loans, each with its own value, owned by individual investor banks, each with its own agenda.
What if one bank wants to write the value down to market, but another doesn't? What if one bank wants to sell its share, because it needs some cash to meet its obligations? What price can it ask or get if there isn't any agreement between the owners as to the value of the shares of this security?

And, because these securities are concentrated in the hands of the banks that lend to your bank, and no one has any idea of what these securities are worth, is why the US Treasury has just spent $3,600 for every man, woman and child in the United States. If your bankers' bank won't lend money to your bank, then they can't lend to you, and we're in a deep pile, and it's not just a deep pile of debt.

It doesn't matter who caused this mess, and there is enough blame for everybody, except maybe you and me, it seems that with banks being so interdependent and their investments being so convoluted, there isn't any other way out of this mess. Let's just hope the Fed can recoup their investment, and it doesn't become a big tax debt we have to pay. Jeez, what a mess.