Bailout “profit” is taxpayers’ loss

September 1, 2009

Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.

That’s a nice chunk of change, but taxpayers shouldn’t be fooled into thinking this — or any other bailout — is a good deal.

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.

“As big banks repay bailout, U.S. sees profit” read the headline in the New York Times on Monday. The story was parroted on evening newscasts.

The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once.

So when those recipients pay back TARP — at a decent profit for taxpayers — bailouts all of a sudden don’t seem so bad.

But the bailout was much larger than TARP. There is FDIC’s debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve’s emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don’t know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.

All of these and more make up the implicit too-big-to-fail guarantee that the biggest financials have all received. The total cost won’t be known for years, and the price tag is likely to be enormous.

Look no further than Fannie Mae and Freddie Mac. The moral of their story is that implicit guarantees alter the investment landscape in ways that are very destructive and, ultimately, very expensive.

Portfolio managers kept buying Fan and Fred backed mortgage paper even after the companies’ capital structures had deteriorated significantly. They didn’t care about fundamentals because they were buying a government guarantee.

But eventually the bill comes due. In Fannie’s and Freddie’s case, taxpayers have promised $400 billion to absorb losses.

Instead of learning from that mistake, policy-makers thought it wise to repeat it on a larger scale, backing not just the housing market, but most of the financial sector, too.

The $500 million that the Fed and Treasury could collect from Bank of America is a nice token sum. But it doesn’t begin to pay the cost of BofA’s implicit guarantee against failure.

Taxpayers should keep that in mind whenever they see misguided reports that they are making money from bailouts. The truth is that the biggest banks are still insolvent and, ultimately, their losses are likely to be absorbed by taxpayers.

Comments

The trouble is that the American people have severe ADD and can’t be interested in anything long enough to realize they are getting screwed royally. *In the mind of the average American… TARP = $700b; TARP = bailout; TARP being repaid = good* Trouble is, TARP doesn’t equal the bailout, so the rest of the math should get thrown out too. Only it doesn’t, and ‘the people’ are off to the next buzz-word and hot-topic – can you say health(s)care?

Worst part is, there really is no way to further educate this generation to realize they don’t have a clue. Wanna blame everything on vampire squids and shadow conspiracies? HA! Let’s see where that gets you. I just hope somewhere, somehow, the next generation of Americans care enough to know their ass from a hole in the ground and will fight for change for the majority, not the vocal minority lobbies.

Posted by the Shah | Report as abusive
 

No doubt we are under siege.
Not all voted for this, but it is the battle we face openly, and without much success in eliminating it…

This very much validates why some Nations cannot effectively address the complete dismantle of their own Nations, without the assistance of a concerned community.

Posted by bbay | Report as abusive
 

The problem is that the majority of people in this country are simply too stupid to understand economics. Thats why we have the Federal Reserve system in the first place.

Trying to get more than a small minority of people in any country to understand how they are getting screwed is like herding cats.

Posted by nathan | Report as abusive
 

Saying we’re making money on the bailouts is like saying you’re making money off of your nephew because he paid you back $6 on a $5 loan – while conventiently forgetting that he also talked you into co-signing his mortgage.

Posted by MortgageGuyMN | Report as abusive
 

Good one Rolfe. Succinct and to the point. Just one concern: ‘A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.’ The World chipped, and is chipping in everywhere, even in Nigeria. Also, if the systems have been ‘saved’, how come the banks are still insolvent ? I am too lazy to do the sums, but your numbers above will be interesting per capita tax payers. Also, I wonder what the tax base is – individuals only or other juristic forms too ?

Posted by Casper | Report as abusive
 

As briefly touched upon in the article: accounting rules have been tweaked in order to allow banks show profits where there’s still a loss and likely will always be. Now some of them are using these inflated balance sheets and profit&loss accounts to pay “back” the TARP etc. money, and the reason behind it is clear: were it a financially sound decision then they’d hang on to the money in such an economic scenario as today’s for dear life and rather use it to lend, gaining from interest arbitrage etc.
The ONLY reason I see they don’t is simply that it curtails their ability to pay out bonuses for the performance of their balance sheet which is -again- based on false accounting allowed under the relaxed rules.
So, in actual fact, any refund of TARP money is a sign of worse storms to come, in other words the EXACT opposite of what it is read to be.
So much for the economic savvy of all the national news editors and anchors and it shows that unless CEOs are held accountable with their private funds these things are going to repeat themselves EVEN IF the fiat paper-money system that was and is the root cause of this mess were abolished.

 

Finally, someone who knows the real story and realizes how uninformed so many Americans can be. God helps us.

Posted by Nicholas D Scheidel | Report as abusive
 

The trouble is that a lot of American people know all this and do nothing.

The worst part is we get blamed for everything because we are uneducated and conspiracy theorists. I just hope there is something new under the sun.

Posted by Mark Ricciarelli | Report as abusive
 

There was an economist in the 50′s and 60′s (and also a gold bug) by the name of William J. Baxter, who once commented that 97% of the people are wrong about money 99% of the time.

Posted by Roger L. Jones | Report as abusive
 

There is “nothing new under the sun” because it’s all happened before – no empire or political system is immune to corruption and collapse if it permits the bankers to make the rules and print fiat paper money – while bankrupting the populace and violating the planet with impunity. We’re going down – and it’s not going to be pretty.

Posted by hapax | Report as abusive
 

I almost exploded when I read that headline 2 days ago about the Feds making a $14 Billion PROFIT of the bailout. It’s a shame that Reuters even published it. Shame on you REUTERS. There is only 1 real fix to this problem. ONE, make sure every single incumbent gets voted out during the next election at EVERY LEVEL. They were asleep at the wheel when this mess was going down. Get them ALL out of office, without exception. Our elected officials are in the pockets of lobbyist and campaign contributors. They need to be scared of losing their jobs.

Posted by blackbean | Report as abusive
 

Really, what can the average american do. He has no say because his representatives are bought off by the banking group and numerous other groups. Does anyone know if we still teach civics in our schools or ethics. Seems like we tell our children that they go to school so they can get a fat paycheck and enjoy life. Citizenship is more than complaining. It is getting involved and making changes, such as starting a third, or fourth political party, to replace the puppet parties we have now that say Rah Rah follow me, with their hand out for payment of “selling their vote”

Posted by f belz | Report as abusive
 

Under Bush’s leadership the American Financial sector screwed up and screwed up big time. The Obama administration is desperately trying to correct the problem. He didn’t want this, he didn’t ask for it and it sure in hell isn’t under any progressive agenda that I’ve ever heard about.

To listen to the commenter’s on this article you’d swear that they think they should all be the next Reserve Chairmen if only the American people were ‘smart’ enough to appreciate their wisdom.

Give me a break. FDIC insures over 13 trillion dollars worth of deposits. The last I heard the FDIC has 50 billion worth of assets to accomplish this bit of capitalistic magic.

The Financial Sector is the largest Ponzi scheme in the world and always has been. Is it the ‘best’ system I couldn’t tell you but look around, we’re the most prosperous country on the planet. So long as we keep the idiotic ‘no-regulation-no-government’ Reagan ideologues away from the steering wheel we just might survive this mess.

Posted by Michael Beal | Report as abusive
 

A very good article and an example of the general media’s narrowly focused “not seeing the forest for the trees” approach to reporting. While it is good news that there is a return on investment on this portion of the bailout, the fact that this is just a small piece of the much larger total rescue package puts everything into the proper context. The truth is with such a large portion of the assets on the balance sheets of these large financial institutions composed of toxic assets that are impossible to valuate, the possibility that the American taxpayers will get any of the money back much less a profit is highly unlikely.

We need more balanced reporting that presents the whole story and not just the “good” or “bad” portions that make great headlines and great sound bites. This is political red meat and I can already see the politicians circling the waters and stumbling all over themselves in order to take credit for supporting this program.

Posted by Dan Burgos | Report as abusive
 

I must respectfully disagree with most of the comments published above. While the term \”profit\” is a bit of an overgeneralization, it is unmistakably true, as even the moderator tacitly admits, that there has been some \”return\” on some of the investments,or loans, or -euphemistically, \”bailouts\” – supplied by the government. That should inspire some optimism about future repayments but apparently not with this crowd. It is way too early to know if there will be additional return of more money in the future but the moderator\’s dismal speculation that this will end so badly and so deep in the red because of philosophical differences with the program is no substitute for analysis on a point by point basis. While it is true that a lot of people do not understand economics, it appears to me that a lot of those who are ignorant in such matters are the first to make comments here based on philosophy and not facts.

 

As I post this, there are 13 comments so far, 12 of which are strongly in support of this article. Yet, I know for a fact that many of you 12 went out and voted for Obama or McCain last November, after they made it patently clear that they are in the TARP camp, not yours.

Some of these responses echo a sentiment of futility, whining about “what can we do about it.” I’ll tell you what you can do: STOP VOTING FOR THESE PEOPLE. They have learned that it is OK to do the ridiculous things they do, because you’ll keep voting for them anyway. STOP DOING IT! If you don’t, you are responsible for the destruction of America as much as they are.

Posted by Russ in PA | Report as abusive
 

Nothing will ever change until the electoral college stops awarding its votes on a winner-take-all basis and at least starts dividing up votes proportional to the popular vote. The electoral college keeps Democrats and Republicans in office. So long as there are only two parties, business can easily buy off both of them.

Posted by your friendly local atheist | Report as abusive
 

The bottom line is you can’t trust the republicans or the democrats. They both want to rob you. At least in the case of the republicans, you get money back each april before vomiting out money the other 11 months. democrats make you vomit for 12 months. Why was it we rebelled against the brits? Taxation without representation? Has anything changed?

 

I agree to not vote for any incumbant until two things happen. First lobbist are outlawed, and second there are severe term limits for all. I admit I voted for Obama but what other choice was there really. Since the election I have been disappointed by most of his decisions from increasing the stimulus program and also increasing the “war on terror” and sending additional troops into Afganistan. The military/industrial system is worse than any banking system.

Posted by LTC RET | Report as abusive
 

There is only ONE reason we are in this siutation: stupid and corrupt government.

Our president is a moron and those who believe he earned his “Ivy” credentials should read about affirmative action.

So the holder of our highest office is actually moderately stupid and so is most of Congress. The Wall Street scoundrels are and always have been assholes and they easily take advantage of the American people. Congress and our pres are in their pocket and those of us both smart enough to think for ourselves and moral enough to not cheat others are the losers. We lose because we see the irony and arrogance but cannot do anything about it because of our assinine “democratic” government run by slimy lawyers.

Posted by ty | Report as abusive
 

TARP = $700 billion. Payback so far ~ $4 billion. By my reckoning taxpayers are still in the hole $696 billion. “Profit” means what is made over and above initial investment. So we’ve got a long way to go before we profit from the TARP bailout.

Posted by CBDenver | Report as abusive
 

I read that headline 2 days ago about the Feds making a $14 Billion PROFIT of the bailout. It’s a shame that Reuters even published it. Shame on you REUTERS. There is only 1 real fix to this problem. ONE, make sure every single incumbent gets voted out during the next election at EVERY LEVEL. They were asleep at the wheel when this mess was going down. Get them ALL out of office, without exception. Our elected officials are in the pockets of lobbyist and campaign contributors. They need to be scared of losing their jobs.

 

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