Counterparties: The bailout according to Treasury

April 16, 2012

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

The Treasury Department is out with a new presentation on the bailout, which attempts to calculate the combined costs of the crisis-era bailouts, including TARP and actions by the FDIC and the Fed. If you think Treasury’s accounting is even directionally correct, the presentation has some very good news: The bailout cost less than expected, averted a deeper crisis and may even turn a net profit.

It’s a convincing case that rescuing the financial markets was necessary. But that’s much different from saying the bailouts were perfectly executed.

This is a document about a messy collection of programs. Which is why we get things like this convoluted slide intended to illustrate how the government’s myriad financial arcana helped individual Americans.


This chart is the crux of Treasury’s problem: If you’re trying to convince Americans that things could be much worse than our 8.2 percent unemployment, protracted foreclosure crisis and fragile recovery, it helps if you can tell a simple story. And this is not a simple matter.

Contrast Treasury’s take with another regulator’s. Sheila Bair, who was head of the FDIC until last year, has criticized the Fed’s zero interest rates as a huge subsidy for financial companies but not for average Americans, and has slammed what she sees as a growing “too big to fail” problem – which explains her reported refusal to agree to Geithner’s 2008 request that the FDIC guarantee literally all debt issued by bank holding companies.

It’s telling, then, that the gray line labeled “Financial markets” in Treasury’s chart reaches into each and every aspect of “crisis response that helped support families and business.” More than three years on, Treasury still can’t shake the perception that this was a bailout that focused too heavily on the financial markets.

Treasury’s slides suggest a host of markets – including commercial and industrial lending, bank capital and credit cards – are higher or nearly back to pre-crisis levels; the middle class hasn’t been so lucky.

And on to today’s links:

British businessman reportedly poisoned after threatening to expose Chinese leader’s wife – Reuters

How to tell your son that you’re a short seller – Bronte Capital

Income inequality is growing – even for lawyers – WSJ

Why Kodak could never invent Instagram – NYT

Primary Sources
World Bank selects Jim Yong Kim as new president – World Bank

Ezra: eliminating a few tax deductions does not add up to a real deficit reduction plan – WashPo

Rhetoric Meets Reality
Too-big-to-fail banks are larger now than before the credit crisis – Bloomberg

Modest Proposals
Sheila Bair: $10 million loans for every American – WashPo

“The end of 2012 will be unlike any other time in memory for the federal government” – NYT

7-Eleven targets New York’s bodegas – Daily News

Americans sought homeownership but got debt ownership – Math Babe

Goldman sells $2.5 billion stake in ICBC to Temasek – Dealbook

It is private equity, but the public has a right to know – WashPo

EU Mess
Top European banks expecting ratings cuts – WSJ

Yield on Spanish bonds rises above 6 percent – WSJ

Mas Kapital
Biggest European banks would need to hold 17 percent core capital under EU plan – Bloomberg

Banks are worried FHFA may finally consider principal reductions – The Hill

Big Numbers
Facebook controls 28 percent of the display ad market – Mashable


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Repeating an earlier question:

Looking at Chart 16 (the “real output gap”), am I the only one seeing a trend line that fits both 2000-2003 and 2009-2011 quite nicely? We know there was some crazy stuff going on between 2004-2008. Why is that presumed to be “normal” output? Is there some longer-term rationale for placing the trend line that high? (How can there possibly be, when the economy has changed so much in the last 30 years?)

Posted by TFF | Report as abusive

For someone called “Math Babe”, she has a post that completely ignores the basic mathematical fact that extending credit to bubble era homeowners was ultimately a losing proposition for the banks – and is, in fact, based on the opposite proposition.

Posted by realist50 | Report as abusive

British businessman reportedly poisoned after threatening to expose Chinese leader’s wife – ” (Article)

Not shocking to anybody with first-hand experience with the Han.

Posted by MrRFox | Report as abusive

Banks are worried FHFA may finally consider principal reductions – The Hill” (Counterparties’ item, above)

From the cited article-

“of the estimated 11 million who are underwater on their loans nationwide…. homeowners would receive, on average, about $51,000 in loan forgiveness.”

Lets see, multiply by 51, carry the … that comes to $561 billion to write-down underwater loans to FMV.

No problem – TFF assures us the banks can swallow it no problem. Me – I rest my case – they can’t.

Posted by MrRFox | Report as abusive

Now I understand where you are coming from, MrRFox. The problem with that calculation is that much (most?) of the burden is borne by Fannie/Freddie and private MBS holders. The banks only retained a portion of that exposure.

And could the banks absorb their share of a $561B writedown? Probably most of them could. It wouldn’t be easy or painless (I never said it would), but I would guess there is around $1T of Tier 1 capital in the banks right now.

Let’s make it more specific — Wells Fargo has roughly $330B of residential loans on their books and $100B of Tier 1 capital. Do they or do they not have sufficient capital to write down $51k per loan on 1 million loans (roughly their pro-rated share, though I suspect their book is slightly higher quality than average)?

Those writedowns would slam the taxpayers, through our exposure to Fannie and Freddie. They would damage the banks, but most would not be sunk. Even if they were to happen all at once (which is unlikely in the normal course of events).

Posted by TFF | Report as abusive

The reason people think the “bailout” was only focused on saving banks at huge expense is because of lying scumbag “journalists”. The “rescue” of the banks ALREADY has turned a profit. I am sure it is just an accident that you neglected to mention that the losses have come from exactly three sources – bailout of homeowners, bailout of auto companies and bailout of Frannie. As for being complicated, the truth is which is why virtually everyone who attacks Geither or Paulson has to resort to lying.

MrRFox, seriously man learn some of the basics. If Frannie take a hit that is coming out of the US taxpayer pocket. As for the others defaulting, a few whinny horror in the NYT about some person who thought they could get away not paying their contractual debts without any consequences and that will put an end to the nonsense. Especially if it is not an election year.

Posted by Danny_Black | Report as abusive

realist50, also she apparently doesn’t understand the difference between collateral and owning something. Sounds like someone working for the buyside in the bubble.

Posted by Danny_Black | Report as abusive

@TFF: the current output gap is based on a U.S. Potential GDP trend that goes back to at least 1950. The bubbles of the 2000s doesn’t appear to have inordinately ramped potential GDP as much as you think, thus the output gap amount is less influenced by those 2000s bubbles that you are positing. The current output gap is real.

Chart of U.S. Output Gap 1950-2020: w&id=3252

@ MrRFox: “Not shocking to anybody with first-hand experience with the Han.”

Guess I need to re-read your immigration posts in the new light of your illogic. Rather than chalk the Bo Xilai/Gu Kailai scandal up to “every society has its criminal schemers and corrupt politicians”, you denigrate the character of hundreds of millions of Han people based on the actions of two Han criminals – nice work.

Guess all white people are evil because Jeffery Dalmer was a cannibal, or all Africans are corrupt because Mugabe is a sociopathic dictator. The favelas in Brazil have crime – must be a common characteristic of all 200 million of those degenerate Brazilians. Amirite?

Posted by SteveHamlin | Report as abusive

Thanks, SteveHamlin, for clearing that up. So I guess we saw something similar in the 1980s, but perhaps not as pronounced? Further reinforces the concept that this is the biggest recession/depression since the 30s?

Posted by TFF | Report as abusive

Maybe I am just jealous of someone who (by her handle) sounds both hotter AND more mathematically proficient than me by far, but this Mathbabe piece just left me saying “no duh.” Where’s she been for the past, I dunno, 5 years??

The piece from The Hill jumbles all sorts of factoids and rumors such that I am now terrified by the prospect of poorly informed politicians voting on matters that impact us all based on such wretched “analysis.” But wait, what’s new about that either?

SteveHamlin, if MrRFox rephrased his comment to emphasize the dangers of dealing with countries in which rule of law is a starved, neglected beast, would THAT make you feel better? But as a cultural historian I would actually side with Fox here–if the Madame Mao/dragonlady type recurs frequently in the history of a culture (let’s say, going back many centuries) then you can actually say it is a “Han” thing. That is not necessarily racist, but it is culturalist. These are not synonymous.

Posted by LadyGodiva | Report as abusive

For those who believe the banks got off scot-free: dd=1&chds=1&chdv=1&chvs=maximized&chdeh= 0&chfdeh=0&chdet=1334692800000&chddm=295 987&chls=IntervalBasedLine&cmpto=INDEXSP  :.INX;NYSE:BAC&cmptdms=0;0&q=NYSE:GS&nt sp=0

(Would include Citigroup, but for the reverse stock split that skews the chart.) They are trading *DOWN* over the last three years, despite a 60% gain in the S&P500 over that time.

The *bankers* have continued to reap huge salaries, but the *banks* and their shareholders have been seriously damaged. And we still haven’t seen the other shoe drop on that one…

Posted by TFF | Report as abusive

@LadyGodiva – If MrRFox had said “be careful in dealing with countries where corrupt politicians might be above the rule of law”, then yes, that’s a lot better than “don’t trust any Han people because they might poison you.”

You wrote: “if the Madame Mao/dragonlady type recurs frequently in the history of a culture [then it must be true]” – please compare and contrast the ACTUAL relative occurrence of those incidents in Han culture vs any other culture. If you don’t have any such statistics, and continue to apply anecdotal stereotypes based on infrequent instances to over a billion people, then you are a poor cultural historian.

Posted by SteveHamlin | Report as abusive

@LadyG, @SteveHamlin –

I live in a Han dominated society. The killing by elites of inconvenient persons is not an unusual occurrence. I’m not suggesting everyone here is a killer or is bad; merely that in this kind of milieu that kind of thing is too routine – and too routinely swept under the carpet.

Didn’t quite get to “file and forget” in this particular case, but that was probably due to the political power struggle. Without that, the English bloke would have been just another dead, gone and forgotten White guy.

Posted by MrRFox | Report as abusive

@TFF, @DannyB –

Reading the cited article one see some quotes from bankers expressing alarm at the prospect of creating any sort of inducement for underwater debtors to walk or go delinquent on their underwater properties. Banks don’t like this for a good reason – it can’t help but damage them severely.

Under GAAP accounting – where FMV is required, many of these banks are in or close to insolvency in the equity sense, and they certainly wouldn’t meet Basel III. Right now they don’t have to account for it like other entities do, but the reality is there just the same. IMO, absent some miracle, they are going to need more capital – lots of it.

Recapping banks doesn’t mean handing blanket-write downs to borrowers. It makes it possible for banks to survive if write downs happen, but doesn’t demand any kind of forgiveness for debtors. That’s a separate item.

Posted by MrRFox | Report as abusive

@Danny_Black – I agree with your point that “ownership” and “collateral” are quite different with respect to both economic upside (obviously capped for a creditor, unlimited for an owner) as well as the legal rights and responsibilities regarding an asset.

When thinking about the housing bust, though, I do think it’s useful to remember that someone who put 3% down on a house and then paid interest only for a couple of years wasn’t an “owner” in a meaningful sense of the word.

Posted by realist50 | Report as abusive

@MrRFox, you are conflating several different questions.

The banks *do* have enough capital at this point to absorb a write down to market levels. Most of them do, at least. But such a writedown would leave them undercapitalized, needing to raise more money. There is a big difference between “damage them severely” and “bankrupt them”.

Moreover, if underwater debtors walk away, the banks’ recovery is *less* than market value. There are definite costs to processing a foreclosure and selling the property. If enough underwater debtors were to do this, it would definitely wipe out the banks’ capital.

I do think the banks are in better shape than you suggest (at least the ones I’ve looked at as potential investments). But as I’ve said several times, there are still risks that could push them over the edge. Why do you think I haven’t jumped in yet?

There is a heck of a lot of capital in the system right now — they are just facing potentially ruinous risks.

Posted by TFF | Report as abusive

Statistics are not the same thing as “the truth.”

I understand that when you say “the Han” you don’t mean each and every person of that ethnicity. Poor Steve was taught to Hate Racism, though, and is guarding the world from that scourge.

Re. principal reductions,
Listening to DeMarco’s talk last week it was clear that no one has any intention of giving everyone who is underwater relief of any kind. Even the most pro-mod panelist acknowledged that any plan would need to be framed in such a way that NEW defaulters would not be covered, and those who have already been in default too long (6 months was, I believe, the cutoff being discussed) would also not be helped.

That left a smallish TOTALLY RANDOM cohort that would be helped, and THAT FACT is what would make everyone else COMPLETELY CRAZY.

Posted by LadyGodiva | Report as abusive

“That left a smallish TOTALLY RANDOM cohort that would be helped, and THAT FACT is what would make everyone else COMPLETELY CRAZY.”

Wouldn’t that be par for the course, LadyG? I can’t think of a single homeowner-rescue program from the last five years that didn’t ultimately boil down to this.

Might be an oversimplification to construe the debate between Austrians and Keynesians as “do nothing” vs. “do the right thing”, but “do nothing” is especially attractive BECAUSE IT IS CONSISTENT! Very hard to make any kind of coherent plan when government policy changes with the seasons.

Posted by TFF | Report as abusive

“I wonder how much a honest congressman would cost? ” Things will only improve when the middle class out bids the financial sector for congressmen.

Posted by AZWarrior | Report as abusive

@AZWarrior – as long as we have “career politicians” running things there’s not much hope of improvement. They come to DC as people of relatively modest means and become millionaires while they are there. Remember, they are legally permitted to trade on inside information, and seem to have reliable sources of it.

Do you really think the middle class could outbid Wall Street – or should have to? Which raises the philosophical question – Is violence always wrong?

Posted by MrRFox | Report as abusive

@TFF – you wrote – “But such a writedown would leave them (banks) undercapitalized, needing to raise more money.”

Good. That provides the legal and ethical justification to now correct the error originally made during Lehman Weekend – using taxpayer funds (in any manner) to rescue financial institutions then and there “insolvent” in either or both the equity sense or the cash flow sense, and who became so by reason of their own misconduct, and without first placing the institutions under temporary public ownership.

Posted by MrRFox | Report as abusive

Still think the timing is wrong, Fox. At this point you would be artificially creating a crisis situation, with secondary repercussions throughout the economy. Those working-class stiffs who lose their jobs due to the artificial crisis won’t thank you.

But give it another six months or a year, and your crisis situation could create itself… Then we can consider an appropriate response.

Posted by TFF | Report as abusive

“That provides the legal and ethical justification to now correct the error originally made during Lehman Weekend – using taxpayer funds (in any manner) to rescue financial institutions then and there “insolvent” in either or both the equity sense or the cash flow sense, and who became so by reason of their own misconduct, and without first placing the institutions under temporary public ownership.”

What institutions would that be? AIG? taken under public ownership. Frannie? ditto. Wachovia? ditto. Also what is insolvent in the “equity sense”? Why do you insist on bandying about words whose meaning you clearly don’t understand?

Posted by Danny_Black | Report as abusive

TFF, **some** of the bankers who happen to still be employed are getting well paid.

Posted by Danny_Black | Report as abusive

” At this point you would be artificially creating a crisis situation,….give it another six months or a year, and your crisis situation could create itself…” (TFF)

Quite so, no need to rush. Now is the the time to do what was not done over Lehman Weekend – think the matter through and plan an effective and ethical actual solution to the matter.

Wonder how much time there really is though – the focus now is on keeping things from falling apart before the election. Once that’s out of the way ….

Posted by MrRFox | Report as abusive

Good point, Danny_Black…

Still, you have to admit that huge fortunes were made in banking/finance during the real estate bubble. You haven’t shared details of your own history, but I suspect you were part of that.

Minor quibble — Wachovia was pushed into the arms of Wells Fargo, and while there were some public guarantees against losses (did they ever materialize?) they were never a ward of the state in the same way that Fannie/Freddie, AIG, and Citicorp were.

Posted by TFF | Report as abusive

@DannyBoy – sorry, DB, for using legal terms with a general audience – wicked of me. Insolvent in the “equity sense” refers to having total liabilities that exceed total assets. Insolvency in the “cash-flow sense” refers to the inability to pay obligations as they become due and without regard to solvency in the equity sense.

Posted by MrRFox | Report as abusive

MrRFox, and which firms failed to pay their debts as they fell due? Which firms had liabilities exceeding their assets?

TFF, Wachovia was seized by FDIC and sold on, from recollection they used some quirk to avoid the normal FDIC process. Interesting little side-note, they were bankrupted by a purchase of a bank which made billions for the people who fund Jesse Eisenger….

Posted by Danny_Black | Report as abusive

Yeah, I think you are correct on both counts. The “Golden West” acquisition landed Wachovia $100B+ in bad loans on top of whatever they originated themselves. Devastating!

Any idea how much of a hit the FDIC took on that one?

Posted by TFF | Report as abusive

@DannyB – IIRC, first there was Bear Sterns, which got tens of billion$ in gov-guaranties to plug its holes before it was sold on. Then came Lehman, which was clearly insolvent in both senses. Its collapse rippled through the financial world in way that immediately destroyed liquidity – effectively making all players insolvent in the cash-flow sense.

That illiquidity had an impact on asset values, which did – or would have shortly – rendered all of them insolvent in the equity sense. From both angles, the entire industry was facing imminent destruction and was helpless to help itself. Its very survival was dependent of government aid – and that was the moment to act.

At that time, the entire industry could have been legally compelled to reform, and be restructured in a way that was both equitable and best for the society as a whole. Needless to say, the Wall Street types running the government wanted none of that for their (temporarily) former firms. What we got instead was a (temporary) solution that punishes everyone except those most responsible for creating the mess. Those guys came out it just fine. Not surprising – they owned the guys who made the decisions.

Soon, the opportunity to correct that mistake will likely be offered to us. Best that we not pass it up a second time.

Posted by MrRFox | Report as abusive

TFF, no idea, sorry. I know the shareholders got wiped out and I believe some of the debt holders did too.

MrRFox, wow what a re-writing of history. Shame Stalin is dead.

BSC didn’t get “tens of billions” in guarantees. A collection of assets JPM didn’t want got put in a SPV and JPM agreed to take the first billion hit. It is currently making a profit for the US taxpayer.

LEH went bankrupt. The Fed acted as it should as lender of last resort, lending at above market rates against collateral with the appropriate haircut. These operations made billions of dollars for the taxpayer.

The “aid” you are complaining about has to date returned tens of billions of dollars in cash profit to the taxpayer. Maybe you are confusing banks with auto firms?

I refer you to how everyone who criticises Paulson et al always have to resort to lying.

Posted by Danny_Black | Report as abusive

Tried searching Google, and the only mentions I could find were the reporting of the original deal in 2008 and some testimony in 2010. Possible that the book isn’t fully closed on that one yet? Wells Fargo agreed to take the first $42B of losses, with the FDIC covering anything after that. But the losses were never expected to exceed $42B, and actual realized losses (thus far) have generally been short of the initial expectations.

The Wachovia shareholders weren’t totally wiped out (they got a fractional share of Wells Fargo), so I imagine the debt holders were made whole.

Posted by TFF | Report as abusive

TFF, more than possible I am confusing them with WaMu but one of those two banks were the counterexample in a debate with a colleague of mine about the debt holders being made whole.

Posted by Danny_Black | Report as abusive

Yes, with the support of the FDIC, JPM acquired the deposits, assets, and contracts of WaMu, but left the stockholders and bondholders to the mercy of the bankruptcy courts.

It was an odd transaction — in theory, the bondholders should have been senior to the counterparties of the swap contracts.

Posted by TFF | Report as abusive