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Overstating Bailout Costs

Posted By Barry Ritholtz On July 21, 2009 @ 7:11 am In Bailouts,Mathematics | Comments Disabled

“The total potential federal government support could reach up to $23.7 trillion.”
-Neil Barofsky


Yesterday [1], we noted that the 23 Trillion dollar bailout was a “WTF number.”

The statement above really turns on your definition of the word “Support” — this is not the actual costs, but more of a measure of the total guarantees, loans, indemnifications and credit extended in all of the bailouts.

Floyd Norris [2] takes it apart — in detail — and reveals more hyberbole than actual expense, noting that number given in Congressional testimony “was vastly overblown.”

Key factors to getting to 23 trillion:

• It includes estimates of the maximum cost of programs that have already been canceled or that never got under way.

• It assumes that every home mortgage backed by Fannie Mae or Freddie Mac goes into default, and all the homes turn out to be worthless.

• It assumes that every bank in America fails, with not a single asset worth even a penny.

• And it assumes that all of the assets held by money market mutual funds, including Treasury bills, turn out to be worthless.

• It would also require the Treasury itself to default on securities purchased by the Federal Reserve system.

• Every dollar invested by the government in banks would have to become worthless

• The banks would have to default on securities guaranteed by the F.D.I.C.

• All the collateral posted by the banks to get loans from the Fed would also have to become worthless.

Bottom line: In reality, we are unlikely to get anywhere near that number . . .


Big Estimate, Worth Little, on Bailout [2]
NYT, July 20, 2009


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URL to article: http://www.ritholtz.com/blog/2009/07/overstating-bailout-costs/

URLs in this post:

[1] Yesterday: http://www.ritholtz.com/blog/2009/07/total-bailout-cost-237-trillion-dollars/

[2] Floyd Norris: http://www.nytimes.com/2009/07/21/business/economy/21bailout.html

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