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The Cost of the Bailout
THE COST OF THE BAILOUT....Here's a sentence from the Guardian today:
The glut of government initiatives, which included a $326bn bail-out of Citigroup on Monday....
Can we please stop this? Calling this a "$326 billion" bailout is crazy. It's a $20 billion capital injection plus a bunch of asset guarantees with a maximum cost of $250 billion and a probable cost in the low billions. (Possibly zero, in fact.) The capital will probably be repaid eventually, but even if it isn't it's highly unlikely that Uncle Sam is on the hook for more than $30-40 billion.
This stuff has gotten completely out of hand, with "estimates" of the bailout these days ranging from $3 trillion to $7 trillion even though the vast bulk of this sum comes in the form of loan guarantees, lending facilities, and capital injections. The government will almost certainly end up spending a lot of money rescuing the financial system (I wouldn't be surprised if the final tab comes to $1 trillion over five years, maybe $2 trillion at the outside), but it's not $7 trillion or anything close to it. People really need to stop throwing around these numbers as if the bailout is comparable to World War II or something. That's not reality based, folks.
The Guardian these days (see also the BBC) is getting worse and worse in its exaggerations to grab eyeballs for its pages. It was rather better when it was still the Manchester Guardian.
Very good point by Kevin, though in fairness the Guardian is using the same language as the rest of the press is using, as far as I can see.
The numbers are huge, and what's going on is complex, and many people are confusing notional insurance amounts with actual losses that need to be covered. The press -- especially the editors who write the headlines -- are guilty of making things look more extreme than they are.
Calling this a "$326 billion" bailout is crazy. It's a $20 billion capital injection plus a bunch of asset guarantees...
Shouldn't that read more like this: Calling this a $326 billion "bailout" is crazy. It's a $20 billion "capital injection" plus a bunch of "asset guarantees".
Isn't the word "bailout" the one Kevin is taking offense too here?
But isn't it really a "bailout"? Didn't the banks do a lot of loans on unaccountable, deregulated lending practices, which were based on dicey, over-lucrative money returns, returns which were utterly depend on bubble style projectionism that were never really likely to materialize in the end. In short, a big time gamble that didn't pay off.
Of course they did, and now the banks must be bailed out. So is a bailout by any other name, still a bailout?
Just asking!
he capital will probably be repaid eventually, but even if it isn't it's highly unlikely that Uncle Sam is on the hook for more than $30-40 billion.
And how do you know this? Every single estimation of "this is the bottom" or "this is all the money they need" has proved wrong. How many times have we had to give money to AIG now?
In essence, reporting the full extent of our liabilities is really just the conservative thing to do. It is possible that we will be out $300 billion with nothing to show for it.
Sure, maybe this reporting should be nuanced with "20 billion loan, but the government could lose $326 billion in the worst case". But claiming that additional loses won't happen when they are happening every day seems a bit irresponsible as well.
Kevin, if you are so sure that this loan/guarantee package is going to be eventually repaid, then why is it that Citi negotiated for and got a nonrecourse provision that says that if they default, the government gets the toxic assets put up as collateral and not a penny more?
See Chris Martenson at http://www.chrismartenson.com/blog/citibank-%E2%80%93-no-questions-asked...
Quote: "Why am I confident that Citi will default on this particular rescue loan? Because they are smart people and paying it off would be stupid.
The $300 billion of "assets" pledged as collateral for this loan are worth, perhaps, half that. Possibly as little as 10% if Citi has done its job and purged the worst of the worst from its balance sheet to tuck into this sweetheart deal.
So it's very simple. Either Citi makes good on the loan and repays all $300 billion and then takes possession of perhaps $30 billion of damaged assets or it defaults and keeps $300 billion.
What would you do?"
JS, your comment on confusing notional insurance amounts and actual losses sounds like the same kind of garbage we were feed before the whole system came down.
The NY Times today has a very good break down in what is being offered. It comes to 7 trillion dollars, so far. Much of this is for purchases of bad assets, guarantees and equity stakes, so there is no telling how much the taxpayer will ultimately be asked to bear. But these days it seems the pessimistic view is the one to take.
And the Citigroup loss guarantees are totally outrageous. At least under the TARP the govt got something for its money, even if it was toxic assets at inflated prices. This deal promies the private sector something for nothing. Of course the U.S. govt will eventually be asked to pony up some money.
I never thought this could cost the taxpayer 7 trillion dollars or more. But due to Paulson's incompetence and total disregard for the interest of the taxpayer, it's possible.
"Bailout?" Earlier this week, the increasingly right-wing NPR described workers receiving the unemployment compentsation they and their employers had previously paid insurance premiums for as being "on the dole."
Let's start calling the money we taxpayers are giving all the already-rich bankers what it really is. Nothing they've paid for, nothing they've earned, nothing to reward them for a contribution to society, nothing to compensate them fo revents out of their control -- "THE DOLE" but make sure it's all in caps, because they are, after all, the masters of the universe.
Amen
Kevin, I appreciate your desire for accuracy on the part of information that is critical of the bailouts you cheered for.
However, it's kinda hard to put a price tag on things that will be very expensive if the economy goes to hell and won't be expensive at all if everything gets better.
How do you propose writing about things in a way that is accurate and economical on the words?
BTW, I notice you, Kevin, aren't so terribly upset that the Bush administration isn't using the TARP bailout money for what they said they'd use it for.
You told us skeptics that the money was so essential we didn't have time to get detailed answers to questions.
So, it seems, Kevin, you have a bit of a double-standard about accuracy. The government and corporate fat-cats aren't especially obligated to be accurate or truthful, but media people are bad for using numbers that make the bailouts look bigger than they are.
The TARP was supposed to be about buying toxic assets at punitive but survivable rates.
Why didn't the TARP work?
Buying the toxic assets at less than 95% to 98% of face was not survivable for the leveraged holders. So this process was abandoned.
Now it is an ad-hoc distribution of money by Wall Street insiders to other Wall Street insiders, based on an opaque analysis by a handful of people.
"Bailout" is a far kinder word than I would use--especially with the gang of criminals that are overseeing the process now.
The guaranteeing of many trillions of dollars of dodgy assets with a loss rate of only a few hundred billion to the taxpayers is hardly credible.
Time will tell, but I'm not sure why trust in this administrations honesty and ability to competently execute any policy is suddnely to bhe taken for granted.
They have once again side-stepped all accountability, they have successfully ommitted the US to another apparently un-ending and expensive obligation.
I suggest that people start to review the Anti-Deficiency Act in relation to the financial committments that the Bush administration has hung around our neck.
It's at times like this that Kevin betrays his proferred credentials.
What is he ragging about?
Noone else has been able to guess what the losses are going to be, let alone the range of what they could be. Not for the economy, not one industry, not one company.
Paulson is behaving in an erratic, speculative, irresponsible and secretive manner when coolness, openness and dollars-for-responsibility (and return) are what are needed.
And so far, except at AIG, noone has taken responsibility for the losses, complications and stupidity they've got their corporations into.
So what is Kevin hot about? The way a newspaper writes this abortion up?
Talk about shooting the messenger.
And for those who haven't noticed, The Guardian, at least, is not the lap dog of anyone.
Oh, yes! And this from the man who admits he doesn't have a clue about the mechanics of this mess.
Move on, Kevin.
I agree with Mr. Drum. Backstopping things like money markets and GSE-subprime-CDOs/MBSs is a guarantee, not a handout. More like insurance.
Assume that 30% of subprimes that were made between 2003-2006 go belly up. (I think it's a fair assumption, because these loans will be upside down, massively, for a long time. Walking away looks way too good).
It will affect the MBSs etc., but the banks will eventually recoup some of the loss on resale. Maybe half.
The problem is untangling the securities and counterparties that have exposure to them. This will take forever, and may be impossible. This is why the govt. is throwing large sums around in the form of guarantees, so the untangling won't be necessary. Investors can go back to thinking they are AAA or better, since the govt. eats the downside.
Maybe one trillion, when all is said and done. Not 4-7 trillion. Will take a decade to know though.
I'm personally against the bailout of these investors if it matters.
Kevin, you should try to get on the Talk Me Down segment of the Rachel Maddow show. Last night she was using $4.3 trillion, and saying it was more than the New Deal and the moon landing and the Vietnam and Korean and Iraq wars (plus a couple more things) all put together, even in adjusted dollars.
g. powell, do you think the 7 trillion represents actual government disbursements, or mostly guarantees?
Drawing attention to the difference, as Kevin did, is not "garbage". It happens to be the truth. You are very confused.
JS- Mostly guarantees.
I am not confused. I know what guarantees are, they are guarantees. You don't offer them unless you are willing to put up the money, just like the U.S. taxpayer has courtesy of the Mr. Paulson.
Yes, it's just like insurance. And it's just like we've just had a major earthquake, a hurricane and forest fire at the same time. And believe me, there is more to come.
And I'm tired of the lies and the people who cover for those lies -- Iraq, Katrina, tax cuts, etc. Anyone who believes this will cost less than 3-4 trillion bucks I think is deluded.
Here's the difference: if we just wipe out shareholders and nationalize the failed instituitions, it would cost about 2 trillion dollars. But instead, we're trying to to revive the institutions and protect exisiting shareholders at the same time. Hence a more expensive propostition.
What part of this don't you get? Do you really think this will cost taxpayers under 100 billion dollars?
g. powell, Kevin made a specific point (reread his post) about the difference between guarantee amounts and actual payouts.
You say a lot of things about a lot of things and come up with a vague statement that this will cost a lot. It may cost a lot, but Kevin's point (which I indicated agreement with) still stands.
I wish I started the policy
I wish I started the policy of backing up the computer first long ago. This is a good tip. Also, be sure to get business insurance.