15bailoutgraf01 On Monday, I said that the total cost of this bailout could scale up to $3 trillion — I just didn’t imagine it would happen by Wednesday.

We learned yesterday that the size of the bailout just tripled, from $750b to $3T. Here is the cost structure:

$250 billion of capital into banks;

Guarantee $1.5 trillion in new senior debt issued by banks;

Insure $500 billion
in deposits in noninterest-bearing accounts (primarily businesses accts).

In exchange for this largesse, the treasury, on behalf of taxpayers, receives:

Preferred shares that pay a 5% (rising to
9% after five years);

•No voting rights for government;

• Warrants to purchase common shares = to 15% of initial investment

All told, its a massive program that makes my earlier forecast of 2-3Trillion obsolete. New forecast is now double: $4-6 trillion dollars . . .

More details at articles below . . .

Sources:
Drama Behind a $250 Billion Banking Deal
MARK LANDLER and ERIC DASH
NYT, October 14, 2008
http://www.nytimes.com/2008/10/15/business/economy/15bailout.html

Bailout Critic: Plan Could Cost $3 Trillion
ALICE GOMSTYN
ABC NEWS Business, Oct. 13, 2008
http://abcnews.go.com/Business/Economy/story?id=6022145&page=1

Americans Embrace Big Government to Help Solve Market Crisis
Edwin Chen and Matthew Benjamin
Bloomberg, Oct. 15  2008
http://www.bloomberg.com/apps/news?pid=20601070&sid=alhCRwBpIK0U&

Devil Is in Bailout’s Details
Government’s $250 Billion Cash Injection Sparks Welter of Issues
DEBORAH SOLOMON and DAVID ENRICH
WSJ, OCTOBER 15, 2008
http://online.wsj.com/article/SB122398468353632299.html

Category: Bailouts, Credit, Dividends, Federal Reserve, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “New Bailout Price Tag: $2.25 Trillion Dollars”

  1. Stuart says:

    I wonder if Cheney’s heart difficulties this morning are from the sudden realization that deficits do matter, but his moment of epiphany just happens to be a tad late.

  2. Scott in Chicago says:

    For some reason I’m reminded of the old Andrew Dice Clay one-liner: “Little boy blue…..He needed the money!”

  3. DL says:

    The other question is, how will this be accounted for when assessing the budget deficit?

    Will the government use “mark to market” accounting, or “mark to model”…?

  4. adam says:

    Each trillion seems to bump up 10 treasury rate by about 10 basis points. So, per your estimate of $5 trillion, we’ve climbed from 3.6 to close to 4.1. Of course, each tick up in rates makes borrowing less likely and defaults more so, which in turn pushes up the bailout tab. Yikes!

  5. Bruce in Tennessee says:

    The Chen and Benjamin article is just what is wrong with the press…

    Americans embrace big government to help solve market crisis.

    I read the article. A more apt headline would have said:

    Americans Hope Government Will Help Solve Market Crisis…

    Embrace and Big are just emotional tag words to help improve readership…

    Humbug…(But it is another beauuuuutiful day here in East Tennessee)

  6. Don says:

    What I don’t understand is how, even with Super Bear Roubini updating his most pessimistic forecast to a total debt-related loss of $3 trillion, we need to spend MORE than that to rescue the system?

    If Roubini is right, and credit related losses are $3 trillion, shouldn’t $3 trillion clean the entire mess up? What am I missing? Is it the multiplier effect that banks have?

    By the way, when you take the global amount pledged to clean up the system, as of yesterday it was 3.3 trillion. The U.S was at 1 trillion (250B already spent on AIG, FNM, FRE and 750B in the rescue package) and 2.3T from the rest of the world. If the US portion goes up as much as BR says, the global number is nearly TWICE the maximum loss amount that Roubini fears.

    Barry, maybe you could address why the bailout packages have to be so large that they outstrip Roubini’s worst case expectation for losses.

  7. me says:

    $3 trillion. Poof.

    It’s not very comforting at this stage of the game to find out that Paulson was John Ehrlichman’s assistant in 1972 and 1973.

  8. Pat G. says:

    “• $250 billion of capital into banks;”

    That was the easy part. Now they have to figure out how to force banks to lend and citizens to take on more debt. Pathetic!!

  9. Namazu says:

    There’s no reason for you to be as sloppy as ABC news. The word you want is ‘price,’ not ‘cost,’ which will be the net of your first set of bullets minus your second set. I’m sure if I were to say FNM/FRE are going to cost the taxpayer $3T, you’d go ballistic. Disclaimer: I’m deeply unhappy about both sets of bailouts.

  10. Marc says:

    When the government guarantees debt how is this an expense? There is a cost and an obligation but the total costs you’ve portrayed would only happen if everyone of the guarantees goes insolvent with no liquidation value.

    I suspect the true cost is far less than $2.25 Trillion.

    Care to elucidate?

    Cheers,
    Marc

  11. Estragon says:

    Namazu

    Cost isn’t the first bullets minus the second. Cost is unknown.

    The “price” is only the $250billion equity purchase, plus whatever value might be imputed to the bond guarantees. As I understand it, the deposit guarantee program is to be premium funded after a 30 day “free trial”.

    The ultimate cost is unknowable, and will depend on, among other things, the terminal value of the pref shares, and the losses (if any) on the debt guarantees.

    I’m not an apologist for any of these bailouts, but let’s stick to the facts.

  12. Bill says:

    I thought that by now I would be getting used to this (desensitized). I still get queezy when I read these kinds of articles -

    http://news.yahoo.com/s/ap/20081015/ap_on_bi_ge/financial_meltdown

    http://online.wsj.com/article/SB122402768546534409.html?mod=article-outset-box

  13. Truth08 says:

    This is why government intervention cannot work! For one, they distort the market by making normal lending prudence irrelevant by guaranteeing loans. Then the sticker price increases, because it’s not their money, and politics dominates the decision making process. The purchasing power of the dollar is going to plummet once this added liquidity starts getting used and banks start lending again. Be sure to invest in something that will outpace the rate of inflation, or you will find yourself with nothing and left holding the bag.

    The Truth Shall Set You Free – There goes the value of your dollar

  14. John says:

    Any of you think this is going to eventually effect inflation and consequently be good for inflation linked bonds?

  15. lithuania says:

    In an era of “creative destruction”, here is Schumpeter’s warning:

    Schumpeter’s theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form.

  16. ECONOMISTA NON GRATA says:

    Funny:

    Bush Calls For Panic
    OCTOBER 15, 2008 | ISSUE 44•42

    WASHINGTON—In a nationally televised address to the American people Wednesday night, President Bush called upon every man, woman, and child to spiral uncontrollably downward into complete and utter panic.

    http://www.theonion.com/content/news/bush_calls_for_panic

    Best regards,

    Econolicious

  17. JohnW says:

    Perhaps Paulson and company are forcing cash into the banks so that when hedge funds unwind or more Lehman “like” guarantees come (.91c on the dollar losses) happen they have the funds to pay back?

  18. craner says:

    Cost of preferred purchases would be the value of the subsidy, if any, provided to preferred issuers via being charged a below market rate. This subsidy is theoretically offset by the value of warrants and decreased risk of systemic meltdown.

    The cost of insuring bonds and deposit accounts is equal to the premiums received plus imputed interest earned on unearned premiums & reserves less losses incurred.

    Bottom line: if the bailout is priced and administered properly, the cost may be minimal. Unfortunately, the gov’t is not pricing these products to account for individual risk. The government will necessarily suffer adverse selection and incur more losses than it should. Any insurance company that would price business that way would go quickly bankrupt.

    That said, other commenters are right. The cost will be substantially less than $3 trillion. The concept of the bailout is good. The pricing scheme is questionable.

  19. bdg123 says:

    Roubini is right for the wrong reasons. The $3 trillion number is based on faulty logic. And, his underlying premise for the cause of this crisis is wrong.

  20. bdg123 says:

    Schumpeter lifted that perspective from Marx.

  21. DL says:

    No doubt a lot of this money will be recouped at some point. But what happens to the money then?

    To some new spending program.

    And the politicians will start “counting the chickens” before they hatch.

  22. esb says:

    Are you all certain that Paulson did not work for Spiro “May I Have the Envelope, Please” Agnew?

    He seems like a bag man to me.

  23. wally says:

    The basic principle that has been agreed to is committing future taxpayer work into present bailouts for the ‘right people’.

    The obvious next step is the realization that there is now too much overhang on the taxpayer and future investment will be crimped. Therefore, all countries who are now doing this giveaway will look to the inflation tool to dimish the debt.

    Protect yourself.

  24. leftback says:

    Paul Kedrosky was on CNBC this morning countering the usual cheery faces, he was excellent, by the way. Darda was on as well, being bearish, but since he is almost always wrong….

    Rick Santelli was pointing out that he has been right on the major moves of the $ this year and also states that we have seen the low yield for the year in the 5- and 10-year. I bet he is long gold and short the 10-year.

    Bretton Woods would be a great place to agree to go back on the gold standard, don’t you think?

  25. CNBC Sucks says:

    Three weeks ago, I had a now forgotten debate with Douglas Watts and wunsacon (both more or less liberal thinkers, by the way) on the Democrats having been “politically trapped” by the Bush Administration to go along with the bailout:

    http://bigpicture.typepad.com/comments/2008/09/baillout-plan-t.html

    Can you imagine if the Dems had fought the bailout and the stock market caved as it did anyway (even if I still think this crash sucks so far)? Obama would have been toast.

    My point here is that (a) Paulson could have probably asked for $10 trillion and gotten what he wanted…we taxpayers may have gotten off lightly given the historic extortion tactics of Disaster Politics, and more importantly, (b) I was right.

  26. DavidB says:

    I guess it is time to start the movement. The government and banking system are desperately trying to jump start the credit machine again and when they do the monster will start growing again. I think it is time that people stop feeding the beast. I think it is time that people use the only power they have left.

    That is it is time for all true patriots and fair market advocates to swear off all debts.

    This is the only way you are going to take away the power from these people and give it back to the citizens. The sooner a no debt movement gets going the sooner America will get back on the road to prosperity. Even if you are making money on the arbitrage, even if you can afford that mortgage, even if you can write off that loan interest from your investment it should now be becoming clear to you that the dollar gain you make today will be 10, 20 or 50 dollars for the banking system fighting and pricing you out of the marketplace five years down the road. It should also be becoming clear to you what it will mean to your kids and grandkids over the next 50 years. You can’t outrun the money machine you can only kill it.

    Since every American citizen knows their politicians and the CEOs of the country will no longer listen to them it is time to hit them where it hurts. If they will not turn off the ponzi scheme that is the fractional reserve banking system then there is one set of people who can. That is the people who are using this credit.

    This goes for small businesses too. Instead of taking on that line of credit do everything in your power to run a cash only system. Cut the banks out of your prosperity before they drain all the prosperity from your company by inflating you out of the game

  27. wunsacon says:

    CNBC, I remember reading your reasoning about the Dems’ and the analogy with a “mercy f***” in giving in to the Bush admin’s bailout proposal. (Clever — in a Comedy Central sorta way!) ;-) Anyway, even though — you’re 100% right — it risked political suicide in the short run to oppose the bailout, that’s what I would’ve liked them to have risked. I.e., I would’ve liked the Dems to oppose *that* bailout proposal and instead offer and debate counterproposals.

    The top 1% owns something like 50% of the wealth in this country. Bailing out bondholders benefits the top 1% by a greater proportion than the little people. Honestly, unless the Dems follow thru by monetizing and giving $20k checks to every poor person, what the Democratic party just did — unknowingly (but isn’t it their job to know?) — is screw the little guy. (Sorry to say.)

  28. dozer says:

    I hope you all are way smarter than all those in power because I am a total neophyte in the financial lingo but after 2 plus years of self study I’ve learned one thing. The public knows only one (1) way to monitor the economy ,’do I have a job?’. If they still have their job the economy is fine and running as always. If not then the economy is bad. Sure you know there are many factors but Joe and Jane Public have not a clue what is being given away to the mega rich that we will all pay for, for the rest of ours and our children’s,children’s lives .
    To CNBC Sucks, Your valuable suggestion is the ultimate boycott
    Cheers

  29. wunsacon says:

    By the way, we’ve already discussed the pros and cons of the bailouts on this board. In case I didn’t say it before, I would never have backed the Fannie/Freddie debt, where the debt says “not backed by the federal government”. Unfortunately, these trains — and there are many of them — have left the station.

    Unfortunately, I think these trains are headed off the rails and in the direction of the very houses they were supposed to save.

  30. Lurid & Alarming: the New AMERO current and the collapse of the U.S. dollar.

    OK — I’m 99% sure this guy, Hal Turner, is nuts, somehow, but he’s making some pretty lurid and alarming and convincing claims that the government expects to default on it’s debt and that the U.S. dollar will collapse.

    Here’s his youtube announcement:

    New AMERO currency.

    and one of his blog posts:

    AMERO shipped to China.

    I really don’t believe any of this, but I know a few people who are buying it all. Can anyone comment? Thanks?

  31. equtz says:

    This massive amount of treasury “crowding out” will continue to imperil virtually ever other asset class…..

  32. Jim says:

    Here’s my total:

    Feb Economic Stimuls – $168 B
    Mar Feb loans backed with MBS as collateral – $400 B
    Mar Fed guarantees Bear – $29 B
    Sept AIG – $85 B
    Sept AIG (2nd loan) – $37 B
    Sept AIG (3rd loan) – $9 B
    Sept FRE/FNM guarantees – $200 B
    Sept Currency swaps – $180 B
    Sept MMA guarantees – $50 B
    Sept “Bailout” – $700 B
    Total commitment – $1,858 B

    Losses
    Countrywide – $172 B
    Bear Sterns – $399 B
    IndyMac – $32.3 B
    FRE – $879 B
    FNM – $886 B
    Merrill Lynch – $966 B
    Lehman – $639 B
    AIG – $1050 B
    WaMu – $310 B
    Wachovia – $812 B
    Total – $ 6,146 B

    Gov Commitments + Losses = $8,000 B

  33. mlucey says:

    250b into banks means leveraging that up to at least 2.25t back at the fed window and that still won’t be enough

  34. Murph says:

    $2.5 Trillion !

    We need to STOP throwing money down a hole by giving it to banks unwilling to lend and consumers unwilling to spend.

    A more effective way to combat the present crisis would be a straightforward dose of “G”. Direct Government infrastructure spending is superior to continued market intervention, which is eroding the foundations of our system in all kinds of ways.

    We should issue a voluntary subscription of “War Bonds” to be used to rebuild American infrastructure.

    Americans would heed the call and voluntarily subscribe in large numbers to a direct appeal by people they trust.

    Thanks for anyone who can take a minute to check this out:

    http://macrobuddies.blogspot.com/2008/10/rebuilding-america.html

    .

  35. Blu-man says:

    I agree with “CNBC Sucks | Oct 15, 2008 1:07:34 PM,” this is the only way to pull back our power. We could start by using only small regional banks then cash. This idea has already been formulated, see http://solari.com/ . This lady has been talking about this for a while. It may be the only solution.

  36. thebackforty says:

    Hal Turner and the Amero

    I’m not one to dismiss accusations of political wrongdoing out of hand but I think this time the accusations are baseless.

    Toward the end of his post Hal mentions “The money-changers that Jesus Christ threw out of the Temple 2,000 years ago.” — AHA- the ugly head of religious fundamentalism is reared.

    Some further Googling revealed this guy is a white supremacist from North Bergen NJ. He denies the Holocaust happened and has, at times, called for the rounding up and killing of all Jews and other minorities.

    According to the Anti Defamation League, a few years back he suggested that a full day of violence against blacks to commemorate his birthday “would be a really nice thing.”

    For my birthday I asked for a new MacBook Pro. I thought that was pushing it!

  37. Blu-man says:

    I agree with “CNBC Sucks | Oct 15, 2008 1:07:34 PM,” this is the only way to pull back our power. We could start by using only small regional banks then cash. This idea has already been formulated, see http://solari.com/ . This lady has been talking about this for a while. It may be the only solution.

  38. Blu-man says:

    I agree with “CNBC Sucks | Oct 15, 2008 1:07:34 PM,” this is the only way to pull back our power. We could start by using only small regional banks then cash. This idea has already been formulated, see http://solari.com/ . This lady has been talking about this for a while. It may be the only solution.

  39. Hmmm,

    I put the cost of switching to IFRS at 5 trillion (http://profalbrecht.wordpress.com/2008/10/01/benefits-and-costs-to-us-adoption-of-ifrs/).

    Call me when he current crisis gets that large.

  40. Hmmm,

    I put the cost of switching to IFRS at 5 trillion (http://profalbrecht.wordpress.com/2008/10/01/benefits-and-costs-to-us-adoption-of-ifrs/).

    Call me when he current crisis gets that large.

  41. Hmmm,

    I put the cost of switching to IFRS at 5 trillion (http://profalbrecht.wordpress.com/2008/10/01/benefits-and-costs-to-us-adoption-of-ifrs/).

    Call me when he current crisis gets that large.

  42. DavidB says:

    That was me Blu-man. Thanks for the kudos and spread the word

  43. Kevin says:

    The economy is in turmoil and all Americans see is the wealthy getting the bailout. I see a way of fixing it and it is very easy, and will not just help a few people but everyone in the United States. We have set aside $700,000,000,000 for the bailout correct. Set aside approximately $330,000,000.00 of the $700,000,000,000.00 which would leave $699,670,000.000.00 left to feed the buzzards of Freddie, Fannie, AIG and so on. Take the $330,000,000.00 and send it to every man and woman legally in the United States and have not committed a felony, right at a million dollars a person even the children. Make the parents the executor of the children’s money and make it mandatory that all be invested for their futures once eighteen they are then able to touch the money but only if they attend a higher education program, if not they have to wait till age 24 when they may have some kind of career going at that time. Takes care of federal or personal educational loans, covered. The adults have to pay taxes first on the million at the 32% rate, which would automatically send approx. $ 69,300,000.00 back to the federal Gov. Then they can use the money to pay off mortgages, which will help these failing banks, then pay off high interest rate credit card loans, then buy some kind of alternative fuel type car or at least a fuel efficient car. This would help with the environment and help with homeland security. Not only would it do those things but it would make sure all Americans would have money for medical insurance and should be made mandatory for the use of the money, this would help our failing hospitals from non payment of services rendered. The big thing would be the solution for Social Security for all ages. The amount of taxes paid on capital gains could go straight back into Social Security for the future generations. May God bless you and God bless our great nation the good ole USA.

  44. CharleeFromTheLou says:

    Why the hell didn’t the Fed just divvy the money equally among taxpayers, minus the tax we must pay on it? We would then spend it to correct our own debts, make the investments and purchases we choose. This would have been the ONLY honest way to eliminate the credit crisis, correct the stock market, save businesses that are strapped for cash, and let the weaker, unnecessary ones die off.

  45. Elect08 says:

    Obama is a Socialist who wants class warfare. Did I mention he wants to turn the United States into a communist nation. He wants to reward the lazy with money he plans to take away from the hard working people.

    God help this country if he wins.

  46. Sean says:

    Great article!

    Didn’t we all think this bailout would run much higher than $700 billion?

    I know the government has a great track record of working “on budget”, but we never hear these types of numbers. People all over the US are still worried about the $700 billion.

    There was an article written on October 7, 2008 at http://www.WhyBanksFail.com that went into detail about what the costs were so far, http://www.whybanksfail.com/?p=265. Not close to your new numbers!