Love your blog. I have a question I hope you can answer. I was debating a friend of mine about the bailouts. He claimed that most of the money that the government shelled out has already been returned with interest. Is this true?
While it’s maybe more true than it was maybe a year ago, the notion that “the bailouts were repaid” is still one of the great myths of the crisis era.
Most of the time, when people talk about the bailouts being paid back, what they’re referring to is the TARP or Troubled Asset Relief Program, which among other things involved direct cash injections into companies like Goldman Sachs. It is true that most of the money lent out via TARP has been paid back, with interest. Goldman, for instance, paid back its entire $10 billion loan.
But the bailouts reached far beyond cash loans, and that money is mostly never coming back. Take the case of Goldman. Goldman got $10 billion via TARP, but it also got $12.9 billion through the bailout of AIG, money that it would have lost otherwise; that money is never going to be “paid back.”
Another typical method of bailing out companies without direct cash injections was to allow firms to borrow money against a state guarantee. What programs like the TLGP (Temporary Liquidity Guarantee Program) allowed the banks to do was borrow against the government’s charge card instead of against their own more risky profiles. That way, the banks were able to spend billions less in finance costs on the money they borrowed. Goldman, for instance, borrowed at least $19 billion against the TLGP. How much more would they have had to pay to borrow $19 billion on the open market, without the government guarantee? Hard to say, but the figure is surely in the hundreds of millions.
There were other bailout methods that included getting the state to absorb investment losses (in programs like the PPIP, you kept your investment gains when you bought risky assets, but the state took the losses) and opening facilities that allowed the state to buy crappy assets from banks at above market value. Banks also got to post worthless assets as collateral to the Fed in exchange for cash. None of these things were direct cash injections; they were all sneaky ways to give the banks risk-free “profits” using government guarantees and loans.
The biggest bailout mechanism was the banks’ ability to go to the Fed and borrow hundreds of billions in emergency loans at rock-bottom interest rates, or sometimes at zero. Goldman, for instance, borrowed $600 billion in emergency loans during the crisis period, which makes the $10 billion TARP payment look meager.
Your friend would say that the banks ultimately paid those loans back, which is true, but put it this way: If a bank can go to the Fed, borrow $100 billion at 0% interest, lend it out on the market to all of us suckers as 4% mortgages and 11% credit cards and so on, what does it mean when it “returns” that money to the Fed later on? Are the profits they make in the meantime “earned” money, or is that subsidy? You and I don’t have the ability to borrow at 0%, but Goldman and JP Morgan Chase do.
Not to belabor the point, but there’s another hidden cost to all of us; since the bailouts demonstrated to the market that the state will never let the big banks fail, that means that smaller banks now have to spend more money to borrow on the open market, since they don’t have the same implicit guarantee. So if too-big-to-fail Goldman can borrow at 1.5% while Small-Enough-to-Fail Schmuck Local Bank has to borrow at 3%, that 1.5% is another hidden bailout that will not, of course, ever be paid back.
One could go on and on with this, but here’s the upshot: Yes, the banks mostly paid back the cash bailouts. But they didn’t pay back the money they got via hidden bailouts (like the AIG rescue) and they certainly won’t ever pay back the trillions they received via state guarantees and artificially reduced borrowing costs, which really all came out of our pockets. The bailouts allowed the banks to borrow for less from the state, while simultaneously paying less to private depositors and charging private borrowers more. That’s the real value of the bailout – the difference between how much they have to pay to borrow from the Fed, and how much we have to pay to borrow from them.If you want a more complete look at the bailouts, check out my friend Nomi Prins’s site. She publishes regular reports on how much bailout cash has been spent, how much is still owed, and how much has been extended in guarantees.
Mailbag: Alan Greenspan, David Brooks and Bailouts
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