Business, Economics and Jobs

Financial bailout: as profitable as Google?


People rush to a saving bank in Massachusetts on Oct. 24th 1929, as Wall Street crashed, sparking a run on banks. TARP and other bailout programs appear to have thwarted a depression during the most recent crisis.



It’s hardly an exaggeration to say that the U.S. government’s 2008 financial bailout was among the most universally detested initiatives to come out of Washington in a long time.

Main Street saw it as a government subsidy for fat cat Wall Street excesses. Foreign bankers predicted that the enormous debt burden would repel the world’s investors, who account for a vital segment of the U.S. economy.

Even the bailout’s main advocate and architect, Treasury Secretary Henry Paulson, expressed his disgust. "I share the outrage that people have," he said at the height of the debate over the rescue. "It's embarrassing to look at this, and I think it's embarrassing to the United States of America."

Congress loathed it too. As the crisis peaked in late September 2008 (just weeks before the election), the U.S. House of Representatives actually rejected the Troubled Asset Relief Program, or TARP, the bailout’s main legislative initiative.

That triggered one of Wall Street’s steepest multi-day avalanches ever. With that gun to their heads, lawmakers passed the $700 billion bill days later. Among the doomsayers were Minnesota’s conservative representative Michelle Bachman. “We may rue the day that this passed," predicted Bachman (who now appears to be mulling a Tea Party-backed run for the presidency in 2012). "This doesn't address the fundamental problem of the credit crisis,” she said.

So was Bachman right? Do we rue that day?

Well, maybe not as much as we had feared.

We now know that the bailout largely succeeded in achieving many of its principle goals (even if it has failed miserably in its promise to help Main Street). Of course, the economic recovery has not been robust. Unemployment is still high, and the housing market continues to slump. But the bailout did kick-start credit markets, and calmed the crippling panic that had prevented firms from lending to one another.

And here’s more good news: the cost to taxpayers appears to be as low as anyone could have predicted, according to the Treasury Department and Congressional Budget Office.

Last week — almost exactly two and a half years after President George W. Bush signed bill — the Treasury projected that the U.S. government’s entire bailout program (including TARP and various other programs) would actually earn taxpayers a profit of $24 billion.

“We have to give the government credit for stepping in at a time that was tremendously risky, when the entire financial system was desperate,” said Roger Leeds, director of the Center for International Business and Public Policy at Johns Hopkins School of Advanced International Studies. The bailout largely “did what it was designed to do, and the bonus is that the taxpayer came out whole,” Leeds said.

Compare that $24 billion profit to Google, which earned about $19 billion over the past two years. Or compare it to the dismal predictions of Neil Barofsky, TARP’s special inspector general. “TARP has evolved into a program of unprecedented scope, scale and complexity,” he told a House committee in July 2009. The U.S. could be on the hook for as much as $23.7 trillion dollars, Barofsky said.

It’s important to point out that the music hasn’t exactly stopped on the bailout yet. Nor does everyone agree that the enormous bailout ledger adds up to as sanguine a scenario as the government says it does. But even by the most pessimistic accounting, the financial outcome has been so strong that it would take a cataclysmic shift for taxpayers to do much ruing over whether the bailout was the right move.

In a recent report, the Congressional Budget Office detailed how much the government has shelled out under the TARP part of the bailout, and what taxpayers can expect to get back. Of the $700 billion approved by Congress, the Treasury has spent $410 billion, and has received a net of $244 billion back, via repayments, investment gains and dividends that recipients are required to pay. It’s written off $11 billion as unrecoverable losses, largely because under the auto industry bailout, it sold part of its stake in GM for less than it paid.

Of the remaining $156 billion, the office says that embattled insurance company AIG accounts for the biggest chunk, owing $66 billion. The government — which owns almost all of AIG — thinks it can recover all but about $14 billion by selling its stock in the company. Meanwhile, the auto industry still owes $42 billion, of which all but $14 billion is expected to be recovered.

As for Wall Street, believe it or not, that’s where the good news appears to come in. The Treasury last week announced that it has already begun to make a profit on the financial institution segment of the bailout. It had invested about $245 billion in the sector, and has so far recovered $251 billion. The gains come from appreciation in the stock that the government took, and from dividends the banks are required to pay. 

Despite that profit, banks still owe the Treasury $30 billion. By the time the program is completely unwound, the Congressional Budget Office estimates that taxpayers will come out $16 billion ahead from assisting some 707 financial institutions. (Forget too big to fail: TARP rescued such pillars of the American financial scene as SunTrust Banks, KeyCorp and Financial Institutions, Inc of Warsaw NY.)

This good news from banks is somewhat deceiving, however. Part of the reason that the sector has done so well is that the rescue plan includes major transfers — amounting to billions — from the government via AIG, which had insured large swaths of debt that the banks held. Normally, when receiving payouts from a bankrupt company like AIG, investors would expect to take “a haircut” — to receive only a portion of the money. Government-owned AIG, however, paid at full face value.

But TARP is only part of the bailout. In July 2008, Congress also authorized a rescue of Fannie Mae and Freddie Mac, the quasi-government mortgage investment houses. These institutions have sucked up about $140 billion, of which the Treasury estimates about half will be recovered.

These previous paragraphs add up to a lot of red ink — about $100 billion for Fannie, Freddie and TARP (including some smaller sums that we haven’t mentioned). So how does the Treasury foresee the bailouts earning a $24 billion profit?

That will come from a $110 billion credit that it cryptically calls “Federal Reserve Programs.”

Here’s how that Fed windfall works: Beginning in 2008, as the economy tanked, the Fed deployed its God-like central bank powers to create more than $2 trillion — merely by crediting its account with the money. It invested this newly minted cash hoping to prop up the economy, by creating demand for assets that everyone else was dumping, and by increasing liquidity (basically, making it easy for people to borrow by making money more plentiful). It purchased $1.25 trillion in mortgage backed securities — the same toxic assets that poisoned the financial system. It has also bought more than $1 trillion in U.S. government debt, and continues to do so.

The interest on these investments — which may in part come from the interest you pay for your mortgage — is throwing off good money: $82 billion in 2010 — which the Fed transfers to the Treasury. (Note: We explained the Fed’s powers, as well as the potential risks of using them, in a previous article.)

The money is real, even if it is created out of thin air.

The bottom line remains the same: The bailout medicine appears to have worked. The pain isn’t over yet, but it appears that we’ve averted an economic depression, and the cost to taxpayers looks poised to remain modest.

Still, TARP isn’t Google, nor is it something we ever want to even discuss again. If we had those many billions of dollars to invest in schools, transportation or energy independence, we’d be a stronger nation. So while the antidote appears to have been effective, and while we may not rue the day TARP was passed, it’s safe to go on hating the bailout.

Follow David Case on Twitter: @DavidCaseReport