The bailout profits

By Felix Salmon
December 7, 2009
making an $18 billion profit on its TARP bailout, or at least that part of it which went to the banks. (Never mind the $30 billion in losses on the money that went to AIG.) Kuwait has made $1.1 billion on its Citigroup investment -- a gift horse the Arab state decided not to look in the mouth, selling out at a profit now rather than trying to hold on for further gains. And Singapore cashed in on Citi as far back as September.

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So, all’s well that ends well, right? The government’s making an $18 billion profit on its TARP bailout, or at least that part of it which went to the banks. (Never mind the $30 billion in losses on the money that went to AIG.) Kuwait has made $1.1 billion on its Citigroup investment — a gift horse the Arab state decided not to look in the mouth, selling out at a profit now rather than trying to hold on for further gains. And Singapore cashed in on Citi as far back as September.

Except of course not everybody’s making money: just ask Abu Dhabi, which negotiated much less favorable terms with Citi and has to buy $7.5 billion of shares at $31.83 each. CIC’s Blackstone stake is still underwater, and don’t even ask about Singapore’s experiences with Barclays and Merrill Lynch.

All the same, something’s working right here, at when it comes to the global financial system. The big sovereign investments/bailouts were made at a time when the public markets were closed, and big private capital raises were the banks’ only option. Now the public markets are open again, and the risk is being transferred back into them, where speculators are welcome to continue to bet on banks’ rising share prices should they be so inclined.

Of course, the dodgy assets which everybody was so worried about during the worst of the crisis are still on banks’ balance sheets: the only thing has changed is the degree to which everybody is worried about them. That, and the fact that the Fed’s Zirp has done a good job of force-feeding America’s (and indeed the world’s) largest banks with unprecedented quantities of free money.

What’s unarguable is that while the Fed has done a good job of making the banks profitable again, it’s done a much worse job when it comes to keeping a lid on unemployment. Wall Street loves Ben Bernanke; Main Street, not so much. Now, what are the chances that the two will come into alignment again thanks to the real economy improving, rather than the financial markets taking another stomach-churning lurch downwards?

Comments
2 comments so far

Give me control of the Federal Reserve and I can make all my “investments” turn out OK too…

Posted by mccartbi | Report as abusive

“What’s unarguable is that while the Fed has done a good job of making the banks profitable again, it’s done a much worse job when it comes to keeping a lid on unemployment.”

The Fed’s job shouldn’t be to manage the economy, just to ensure the viability of the financial system. The money supply should not be used to contol the economy, as it doesn’t work. The idea that raising or lower interest rates will rein in or spur growth is wishful thinking, and the sooner we give up on this fantasy, the better.

When growth is higher than desired, it should be limited by restricting access to capital, not just by making it more expensive. Increasing capital requirements for both lenders and borrowers during bubbles not only puts the brakes on the biggest driver of bubbles – leverage – but it also reduces exposure to risk by lenders, including the government. Raising interest rates from 3% to 4$ won’t stop speculators from borrowing when the market they are investing in is rising at 20%. However, higher interest rates cause businesses that are capital intensive to raise prices, resulting in inflation.

Conversely, when we are in a recession, capital ratios should be lowered to encourage more investment and risk taking. Unless interest rates are stifling high, they don’t need to be lowered, all that does is induce bubbles in capital intensive assets, like real estate. Housing prices rise and fall as interest rates fall and rise, and because the cost of housing is a huge part of everyone’s budget, generate great uncertainty and instability.

The Fed, which does not answer directly to the voters, should not be assigned the task of managing the economy. The president and congress have plenty of tools at their disposal for doing that (which is ironic, as they throw most of them out).

Posted by OnTheTimes | Report as abusive
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