“The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.”
-New York Times

>

My definition of an investment profit is simple: You take the money you have invested, and if adds up to more that what you began with,  well, then, you have a profit.

Let’s say on the other hand, you own 20+30 positions; 5 of them are higher than where you purchased them, and all the rest deeply in the red. Net net, your portfolio is down immensely. Most rational investors would hardly call that investment a “profit.”

Looking just at early TARP repayments  means that we are ignoring a) the rest of the TARP; and b) the majority of other expenses, guarantees, loans capital injections, and outright spending that has taken place.

Perhaps the rookies are manning the terminals, with the senior people away on vacation. That would explain the inexplicably clueless headline over at the NYT this morning: As Big Banks Repay Bailout Money, U.S. Sees a Profit.

Excerpt:

“Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.”

Now, by any traditional measure of profits, you include all of the costs incurred against the total revenue, to determine if there is a net gain (or loss).  This simple mathematical analysis of what a profit is — Are we up or down? — seems to have eluded the headline writers.

At least the author makes mention of how tenuous the usage of that word is the article’s body:

“These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.”

What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history.

>

click for larger graphic

31taxpayer_large

>

Source:
As Big Banks Repay Bailout Money, U.S. Sees a Profit
ZACHERY KOUWE
NYT August 30, 2009

http://www.nytimes.com/2009/08/31/business/economy/31taxpayer.html

See also:
Is TARP Profitable?
Daniel Gross
Slate, Aug. 28, 2009

http://www.slate.com/id/2226517/

Category: Bailouts, Mathematics

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.

62 Responses to “Bailout Profits? Don’t Make Me Laugh!”

  1. Onlooker from Troy says:

    They swallowed the propaganda distributed to them by the Treasury dept hook, line, and sinker. Lots of good critical thinking in that article; not.

  2. The Curmudgeon says:

    Let’s don’t forget all the “profits” accruing from the FDIC bank closings. And you should have said “trillions” not “billions” regarding the once implicit, now made explicit, guarantees of Fannie and Freddie’s obligations.

  3. EricTyson says:

    Well, after the scores of articles proclaiming how the gov’t/taxpayers SPENT $700 billion on that first bailout, itemizing the returns on closed loans is needed and appropriate IMHO.

  4. franklin411 says:

    I predict you’ll be eating your fedora on this issue, Barry. The question is: ketchup or salsa?

  5. Marcus Aurelius says:

    EricTyson Says:

    Well, after the scores of articles proclaiming how the gov’t/taxpayers SPENT $700 billion on that first bailout, itemizing the returns on closed loans is needed and appropriate IMHO.
    ____________

    “First bailout” is telling. If there was an honest profit made on the money we foolishly gave the bankers, there would be no need to assume additional bail outs (why would we bail out a profitable enterprise?). Also, BR’s original point — that profit is not profit at all if there is a loss to the enterprise as a whole – focuses, appropriately, on the bottom line.

  6. torrie-amos says:

    fwiw, after listening to all these folks the last 15 years, it amazes me no fund guys are ever concerned about having buyers, as a small bizz owner for 35 years in a half a different endevors, this amazes me, the total unmigated believe that there will always be buyers, of whatever, like sales are just magically always there all the time, it can be no other way

  7. Marcus Aurelius says:

    franklin411 Says:

    I predict you’ll be eating your fedora on this issue, Barry. The question is: ketchup or salsa?
    _____________

    I predict you’ll be standing in line for your ration of staple foods before this is over, franklin. Ketchup or salsa? In your dreams.

  8. Mannwich says:

    I posted that link on TBP in another thread before going to bed. I was laughing going to bed and laughed getting up after looking at this again first thing. Unreal.

  9. franklin411 says:

    @Eric
    Exactly. The treatment of unbooked gains/losses is debatable, but the treatment of booked gains/losses is not. It’s simple math.

  10. cvienne says:

    To enhance the chart, what they need is another category that compares the GOV’T PROFIT LOSS with how much in BONUSES the banks paid to their executives.

    That would tell a better story.

  11. Marcus Aurelius says:

    franklin411 Says:

    @Eric
    Exactly. The treatment of unbooked gains/losses is debatable, but the treatment of booked gains/losses is not. It’s simple math.
    _____________

    Let me correct that for you:

    It’s dishonest math.

  12. Tom K says:

    Journalism is dead. This article and headline was written with the intention to mislead.

  13. Mannwich says:

    @Marcus: The gov’t is all too happy to lie to us, and the American public (and it’s supposed guardians of the truth, our MSM) is all too happy to be lied to. It’s a match made in heaven.

  14. km4 says:

    > Journalism is dead.
    Yes
    America is in a state of pathology and psychological decay.

    I like the way Kunstler characterized it in Hunky Dory

    http://kunstler.com/blog/2009/08/hunky-dory.html
    Here, in the dog days of summer, it seems to me that the situation in the USA is so fundamentally bad, so unpromising, so booby-trapped for failure, that I wonder if there has ever been a society so badly deluded as ours. We’re prisoners of our wishes, living in a strange dream-time, oblivious to the forces gathering at the margins of our vision, lost in a wilderness of our own making.

  15. wally says:

    But isn’t this exactly what Bernanke, and others, are doing when they claim that their actions averted a ‘depression’ but do not provide and accounting of the cost of that aversion? If the cost of averting a depression is as much as a depression, then you haven’t averted one.

  16. cvienne says:

    Speaking of “dog days of summer”…

    … a little trivia

    They call them “dog days” not because of heat or anything… The expression emerged because of the presence of Sirius (Orion’s dog) in the late summer night sky.

  17. Init4good says:

    Journalism is dead., agreed.

    Independent thinking: NEAR DEATH CONDITION, Critical, subject to censorship by mainstream media.

    Television=DEAD

    Meaningful WebBLOGs=very few, keeping thinking folks alive ….

  18. Marcus Aurelius says:

    wally:

    You’re right — but I’ll take it one step further and assert that we have averted nothing. We have extended the payment date and added interest to the cost of doing so.

  19. Mannwich says:

    Makes for a good headline to keep people happy though. I get the sense that we’ll see a slew of these “better than expected” headlines for the foreseeable future in an all-out effort to deny reality.

  20. leftback says:

    “Here, in the dog days of summer, it seems to me that the situation in the USA is so fundamentally bad, so unpromising, so booby-trapped for failure, that I wonder if there has ever been a society so badly deluded as ours. ”

    Agreed, the residue of a generation of self-delusion is the Tyranny of the Incompetent.

    This has been the strangest summer, a dream time indeed, as the masses seem blissfully oblivious of the real state of the economy, as they paddle out into the surf, unaware of the gathering storm.

    Wonder if today is the day when oil dips below $70 and doesn’t bounce? The driving season is almost over and we are awash in products and crude, so seasonals, technicals, and fundamentals are all aligned.

  21. Init4good says:

    <>

    If forest disappears without fire & smoke, with almost all people are staring at a man-made, virtual forest,…..did it actually disappear???

    Are we all staring at monitors ignoring the world (reality) around us??

    Are we virtual??

    Am I in the movie Wall-E ??

  22. ellidc says:

    You do not even have to look at the overall portfolio, at least look at how each entity received money from all sources and how much was paid back from all sources. Just taking consideration of the funds funneled through AIG shows the TARP “profitability” to simply be the banks shifting money around internally to avoid additional regulation. Take the AIG money with no strings attached and pay back the TARP money.

    Also I would love to see how the table values the warrants held by the government. Linus Wilson, who is cited for the table has down other work showing the treasury may not get fair value when selling these warrants back to the companies, so I wonder what his basis was for pegging the values for this table. Given the “whatever it takes” loose money, easy credit environment, it is hard to believe there is going to be any push to extract the maximum value for the warrants.

  23. franklin411 says:

    @KM4
    Regarding whether doing nothing and taking another Depression would have been cheaper than saving the economy. Well, let’s think about that one. GDP dropped 50% during the Great Depression, so assuming Chairman Bernanke had done nothing and GDP dropped 50% as well, that would have cost about $7 trillion.

  24. leftback says:

    The media are all captured. In the present situation, how can you believe anyone’s thoughts on the housing market /stock market when they have a large mortgage/long-equity 401K plan? Compromised from the outset….

  25. Mannwich says:

    @ben22: Agreed. Dipped a toe in FXP last week and am sticking with it for a while. Same with DTO and DUG.

  26. Mannwich says:

    @leftback: We’re all compromised to a certain extent, but some of us are still able to tell/face the truth.

    @franklin411: The calamity defense has been used since the beginning of time by the royals who argue they are helping us all (and rescuing us from disaster), when in reality they’re helping themselves….AGAIN, and again.

  27. HCF says:

    @franklin411:
    >The treatment of unbooked gains/losses is debatable, but the treatment of booked gains/losses is not.

    So in other words, you don’t believe in mark to market? You haven’t really loss anything if you haven’t sold?

    HCF

  28. mcHAPPY says:

    It is great to see I wasn’t the only one scratching my head over how a profit comes from banks repaying a few billion when hundreds of billions were “loaned”. As has been mentioned throughout this thread – critical thinking is dead and it is easier to ignore reality/fundamentals than face them.

    Oil is down with the dollar. This has happened a couple of times lately. When dollar picks up, all commodities/equities are in for some real hurt.

    Nice to see franklin411 back. I’m wondering what happened to Harry. I stand by earlier comments of needing more bulls in here to see a top.

  29. clawback says:

    franklin411,

    I’m still curious what Big Ben has avoided other than losses to bank mgt and to bank and GSE bondholders. No one — and I mean no one — not Bernanke, Paulson, Geithner or their apologists has been able to show the chain of causality that would lead from 1. losses to mgt, shareholders and bondholders at large financial institions to 2. Great Depression 2. These suckers have been given ample opportunity to do so, but they haven’t. I mean come on, if you were taking untold loads of crap from Chris Whalen, Barry Ritholtz, Simon Johnson, Joe Stiglitz, Jamie Galbraith, Ron Paul, Jim Bunning, Aaron Task, Rick Santelli, Janet Tavakoli, Brad Sherman, Alan Grayson, and so on, wouldn’t you at least try to cobble together a plausible explanation for precisely HOW you avoided an inevitable great depression? Of course you would, but they haven’t done so because there is no chain of causality — actual or hypothetical, that would lead to that conclusion.

    The Great Depression had actual bank failures, where deposits disappeared forever — that’s why they had bank runs in the first place. No such thing would happen today — people still bank with C and BAC, don’t they?

    The Great Depression was also exacerbated by Smoot-Hawley which crushed world trade — we’ve so far avoided any repeat off that kind of talk

    And, the Great Depression was also exacerbated by the gold standard and the Fed’s deliberate policy of allowing base money to contract — none of this applies, today.

    Bernanke could have taken Friedman and Schwartz’s advice and engaged in “quantitative easing” WITHOUT also bailing out individual banks and their bondholders. This idea that bailing out the banks avoided a depression and will make us money is crap.

    Finally, BB and HP knew at the beginning of 2008 that they were going to need a big bailout — Neel Kashkari has said so, and so has Philip Swagel (both worked at Treasury). But did the banks and I-banks reduce leverage and wind down trades? Hells no! And BB and Paulson did absolutely squat about it. One could argue, as Peter Boettke has — and BR! — that the implicit promise of a bailout exacerbated the problem.

    (But even if all the bailout socialists were right, wouldn’t it be better to keep our freedom and independence than be held hostage by a bunch of banksters?)

  30. leftback says:

    “As has been mentioned throughout this thread – critical thinking is dead and it is easier to ignore reality/fundamentals than face them”

    Critical thinking is not dead, but it has been bound and gagged, locked in a safe and tossed into the bottom of the East River for the summer. We’ll see if it can do a Houdini in September… along with the dollar, and the yen.

    Dollar and oil both weak – quite unusual. Agree that oil should melt down when the dollar rallies. Could be Wednesday, a crude inventory bump might trigger commodity selling, which in turn would drive the dollar higher.

  31. DeDude says:

    The winners in that portfolio are the ones that would pay back first.

    From what I remember we are still on the hook for the guarantees on some of the debt of those banks that payed back the direct funding. So I am not sure that any of the individual investments can be closed out and counted up yet.

  32. torrie-amos says:

    IMHO, worldwide the fear was social unrest, massive losses of jobs, so they all did what they did. Okay, fine and dandy, maybe not the best path, yet, it was somehwat reasonable. The 18 biggest financial institutions were flat out bankrupt, and then saved, okay, again maybe not best path, yet, somewhat reasonable. What is obvious too all though, is that zero was done to stop the fraud and they are now back to the exact same bs, with outsized profits, every bank now wants to be a big time trading winner like GS, that is where the money is, and since you got funding thru TARP, damned the torpedoes, it’s not like anyone will go too jail, they just say, uhhhhh, stuff looked cheap we bought, sorry it did not work out, just like when they said, stuff looked cheap it looked like it was going higher. From Nov-March banks went from bankrupt to financially sound, even though now anyone can see they are more leveraged than before. So, fwiw, they did a half assed job and are getting half assed results, when we needed the best. It’s shamefull, and everyone at the tops, ie, all countries and politicians are in the same boat, they all know it……..hope springs eternal

  33. leftback says:

    The bondholder issues (C, AIG, FNM, FRE) remain unresolved. It’s not even clear whether the FED swapped them for Treasuries and is now the owner of the paper. This is one of the reasons that a FED audit would be so revealing.

  34. ben22 says:

    “What is obvious too all though, is that zero was done to stop the fraud and they are now back to the exact same bs, with outsized profits, every bank now wants to be a big time trading winner like GS”

    And this is why the worst is still ahead of us.

  35. GB says:

    Looks like CNBC picked up on this one too.
    http://www.cnbc.com/id/32625465

  36. DeDude says:

    I know that the vultures here have a problem with the bailout, because they wanted everybody to die so they could pick their bones and make zillions on juicy assets selling for less than a cent on the dollar.

    My problem is that most of the real hurt from allowing everthing to collapse would have been born by honest hardworking Americans who had trusted Wall Street to take care of their insurance and retirement funds (because they had no other alternatives). The decade long depression, that would have resultet from letting everthing collapse, would just have provided the same multi-millionaire CEO’s that caused the problems (and other leaches), with new opportunities for sucking the lifeblood out of people with a real job.

    What I realy object to in the bailout is that the government didn’t drive as hard a bargain as Buffet did. Why was it only the government intervention in car companies that forced both shareholders and bondholders to feel some real pain for their mistakes.

  37. Mannwich says:

    @DeDude: Keep telling yourself that if it will convince you that you’re right. I, for one, only started trading my accounts when I saw it a necessity to do so in defense of what Wall Street and the feds are doing to us. Believe me, I am no “vulture” that you speak of, similar to others here, I am quite sure, but if it’s easier for you to create a straw man, be my guest.

  38. DeDude says:

    Mannwich; I am not against people who are defending their assets and retirement accounts (everybody has a right to do that). I am talking about people who argue that government should just let the markets do its thing and destroy it all, and then they personally are sitting with their cash, ready to benefit from that destruction of working peoples life. Those are the scumbag vultures.

  39. super_trooper says:

    At 15% annual return…. TARP was $700B, we’re looking at a nice 100B profit in the first year of TARP. With this kind of investment, the treasury will be running a surplus in no time.

  40. [...] is still too early to make a call on TARP profitability.  (NYMag, Big Picture vs. [...]

  41. Mannwich says:

    @DeDude: I hear you. I’m not one of those people and I don’t think most of TBP posters here aren’t either.

  42. clawback says:

    DeDude:

    The “vulture” meme speaks for itself, but show us the chain of causality — why would doing anything other than bailing out individual banks, their mgt and their bondholders have led to a Great Depression? I don’t see it.

    Further, like almost all bailout apologists, you present a false choice: either we hand over the money and we get to walk down the stairs slowly, with empty pockets, OR we get tossed out the top-floor window. The bailout question is not binary — we could have bailed out the *system*, but instead we bailed out individual banks and investor classes (at the expense of others). The choice was never between 100% Bailout vs. Great Depression Two. FDIC receivership and emergency lending by the Fed is one kind of “bailout” path, but we chose one where taxpayers risk everything and bondholders and mgt risk nothing.

    I don’t know of anyone who advocates tying the hands of the Fed and FDIC in order to ensure a sudden, unexpected run of bank failures, as you suggest. No one. That isn’t even a legitimate hypothetical alternative. Instead, we’ve done just the opposite — we’re going to ensure that the zombies suck enough blood to stay alive, and after a decade or so, they’ll be fresh and rosey again. At our expense.

    I’ve yet to hear anyone explain why at this late juncture the bank bondholders are still being protected. For example, about half of Citi’s liabilities are deposits and about half would be “in play” in the event of a resolution or restructuring. Even as badly run as Citi was, that should be a sufficient “cushion” to protect depositors — the idea that people are going to lose their savings or FDIC lost trillions protecting deposits is just non-sense. (Do bank and GSE bondholders have their own lobbyists? Sure seems like it.)

  43. V says:

    Here’s another laugh.
    http://digg.com/dialogg/Timothy_Geithner_1

    Who could have dreamed of a future where someone with the name motobike_man gets to ask the secretary of the treasury a question! Awesome.

    ~~~

    BR: We looked at that here
    http://www.ritholtz.com/blog/2009/08/ask-treasury-secretary-tim-geithner-a-question/

  44. Mannwich says:

    Well put, clawback. My sentiments exactly. Bailing out the system is far different than bailing out individual actors within that system, which is what we’ve done to date. This has far-reaching repercussions that reverberate for years, decades even.

  45. Mannwich says:

    @clawback: I’m convinced that the Feds are protecting large foreign investors like the Saudis, who have big investments in our banking system. Rightly or wrongly, the feds probably view this as a national security issue (isn’t everything today put in that convenient bucket by the feds?).

  46. Swampfox says:

    Wow. It’s like Atlas Shrugged in real life. Jim Taggart showed a profit after the government wiped out the company’s debt obligations as well as providing a little bit of “stimulus.”

    Who said Ayn Rand’s not worth reading?

  47. dmlopr says:

    @clawback 12:36 Well said.

    @Mannwich 12:54 I think maybe before June, I was hearing/seeing how it was agreed upon that oil should be at $70. Politcal stabilty was likely the main excuse.

  48. Mark Wolfinger says:

    Barry,

    It may make you laugh, but it’s typical of how the hypesters present trading results. Report the profits, and ignore all unrealized losses.

  49. franklin420d says:

    @my little bro;
    August 31st, 2009 at 10:00 am
    “I predict you’ll be eating your fedora on this issue, Barry. The question is: ketchup or salsa?”

    Eat a fedora?
    Whoa little bro, what were you smoking this morning?

    Maybe some chips in salsa, but a fedora?

    Ohh yea dude and a pepsi to wash it down.

  50. DeDude says:

    Clawback; when all lending lock up you have perfectly good businesses closing even though they make products that they can sell with a profit – simply because they cannot make the salary payments or pay for raw materials in cash (the only way of paying if credit is frozen. That means workers become unemployed and sit on their hands rather than producing stuff. The unemployed also stop bying stuff and that means more closed factories and more unemployed people. Most countries that experience a financial crisis quickly see unemployment explode up to 20-50%. An economy that is 70% consumption cannot recover when you have a self-sustaining fall in employment so you see a similarly dramatic fall in GDP. What causes a depression is not the bank run it is the freezing of all credit. As franklin411 points out the last great depression saw the GDP cut in half, even though we were a lot more agrarian back then than we are now.

    However, although I do not think they had any other choice than undoing the credit freeze and panic that took hold back in October, there are many things I wish they had done differently.

    Resolving individual banks within the FDIC back in October would actually have been a lot more expensive than the TARP, because it would have forced the massive sale of huge amounts of assets that at the time couldn’t get more than a few cents on the dollar (but currently sell at 30-40 cents on the dollar). If you had given the FDIC just one of the 18 “TBTF” banks it would have run out of money (and then you would have had the bankruns). Even with the FDIC solidly in the black we had a few bankruns last year, if they had gone half a trillion in the red people would have reacted as if they didn’t exist. And the idea that Citi could have been resolved without massive loss to FDIC is BS. Their books say so, but that is because those assets that have a current market value of 30-40 cent on the dollar are being booked at 100 cent on the dollar.

  51. Mannwich says:

    @dmlopr: I remember hearing the same thing now that I think about it. Great point. Look where we are now – around 70. Coincidence? I think not.

  52. [...] made money off the big banks that’ve fully repaid TARP funds, FusionIQ CEO Barry Ritholtz writes at The Big [...]

  53. clawback says:

    De Dude,

    What is this about “when all lending locks up”? You can see in data from the Minn. Fed from last year that “all lending” did not lock up. Yes, there were problems in commercial paper, but if you look closer, high quality, non-financial CP was just fine. Meanwhile, regular old commercial bank lending was up. The problems in CP were primarily with the financials and with the securitization market. Without a bailout, there would have been an adjustment period from “shadow” to “normal” banking, but the Minn Fed data suggests this was already taking place. I’ve still seen no data or evidence suggesting that Whirlpool or Cambells Soup couldn’t fund day-to-day operations. It didn’t happen, nor was the only alterrnative TARP.

    Plus, TARP didn’t unfreeze (the not so frozen) credit markets. The Fed took care of that. Besides, LIBOR continued to climb, if I remember ccorrectly, even afterr the bailout — but even still, LIBOR wasn’t pricing in the imminent collapse of the entire banking system. The TARP was neither a panacea nor was it absolutely necessary — many of us said so at the time. Too bad my idiot congressman didn’t listen.

    Finally, FDIC wouldn’t resolve the banks “in October” — clearly they couldn’t. It would take some time. But that is a far cry from saying bail them out or let them all fall at once. Banks can keep operating, even when they’re insolvent (clearly). This disaster scenario in which all banks liquidate their assets at once is just a scare tactic to cover for the bailouts. Chris Whalen has also explained how BHC’s like Citi could be restructured voluntarily, without formal bankruptcy, if FDIC receivership is deemed too expensive. But voluntary restructuring of the debt was never on the table. Why? Why isn’t it on the table, now? If the bondholders think they can hold the US govt hostage, then we need to replace some people at Treasury post haste. There is no reason under the sun that we are still protecting Citi’s bondholders at 100 cents on the dollar, just as there was no reason to pay out on AIG’s CDS at 100 cents on the dollar. (My idiot congressman only seemed to discover this sometime in March.)

  54. Moss says:

    It certainly is better than seeing all RED. By focusing simply on TARP however they are accentuating only the positive, ignoring all other outcomes. Where is AIG, GM, Chrysler yada, yada, yada.

  55. DeDude says:

    Clawback; I actually don’t disagree that much with you. However, the fact that you didn’t see the kind of collapse I described, is in my opinion because they intervened. I think they had to intervene but as I wrote earlier: “there are many things I wish they had done differently”, and I also wrote “What I realy object to in the bailout is that the government didn’t drive as hard a bargain as Buffet did” and that I didn’t understand “why was it only the government intervention in car companies that forced both shareholders and bondholders to feel some real pain”. So I don’t think our opinions are that far from each other.

    It is my hope that they do not follow the Japanese model and keep zombie banks alive for decades. They should eventually take the zombies out, but allow the system to digest each zombie one at a time until they are all gone – yet they cannot announce that even if it is their plan. Taxpayers have an investment in those banks and you don’t want to talk it down before you liquidate it. You also do not want to close a bank with a loss to taxpayers if it has a chance of surviving long enough to at least pay back all the money it got from government. My hope is that they will come up with new stress tests that use mark to market on assets and a more realistic level of stress. They have the info now so they could calibrate their tests to make sure it does not take out more than a few at a time.

    On the CDS we agree. Way too much of that money ended up paying for what I consider illegal gambling. Only some of it payed for legitimate insurance needs.

  56. clawback says:

    DeDude,

    No, I agree. We don’t disagree that much.

    If Geithner, et al. are secretly planning on chopping up the zombies, I won’t believe it until I see it. To me, it looks as if they plan to “follow the Japanese model” — Geithner isn’t a great liar and he really seems to believe that “liquidity” rather than price is the problem with some of the “troubled assets.” Is he not up to the job — as Chris Whalen and others believe, or is he really a mastermind schemer who will try to save the world as he lies through his teeth? That’s the conundrum we have with all of our top finance officials — it’s almost impossible to know where they have been completely inept, and where they have just been lying, for whatever reason. But then, that’s one of the consequences of a bailout that was never explained truthfully or adequately, and the joke stress tests are a further consequence of that bailout. And again, were the stress tests inadequate by design, as a PR move, or are they really that clueless? The unemployment numbers were ridiculous (literally) and the delinquency rates on conforming mortgages that they estimated were actually lower than what was being reported at the time the tests were done.

    One danger of trying to get taxpayer money paid back, no matter how long it takes, is that the temptation to throw good money after bad is just too strong. What politician is going to advocate letting Citi die, when they say all they need is just 20B more and then they’ll be fine, or something like that? Wait, I think Citi already did that, but you know what I mean.

    You wrote: “However, the fact that you didn’t see the kind of collapse I described, is in my opinion because they intervened. I think they had to intervene[.]”

    Peter Boettke of GMU has a post on the Austrian Economists blog from a couple days ago where he argues that the bailout itself helped to destabilize the markets because the expectation of the bailout, the uncertainty of who the firms would be, and uncertainty about what the terms would be exacerbated the situation by short-circuiting market forces and the adjustment process. I suggested he look even further back, because the banks and I-banks had some idea, or a good idea, of how bad some of the players were, and yet they didn’t reduce leverage enough and they didn’t wind down risky trades and they didn’t do anything, apparently, about short-term liquidity issues. Absent a subservient Fed and FRBNY, these institutions would have acted on information about others’ insolvency and their own risk and adjusted accordingly. They didn’t.

    In a sense, the October bailout called itself into being. Had their been no expectation of a bailout, by the Fed at least, people like Dick Fuld would have behaved differently, and so the conditions which necessitated the bailout would not have arisen in the way that they did. The moral hazard argument has a long time horizon — something that BR writes about at length in Bailout Nation.

  57. [...] Bailout Profits? Don’t Make Me Laugh! | The Big Picture "What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history." (tags: economics bailout government profit investment banking) [...]

  58. Cunning Linguist says:

    How can you be so surprised that The New York Times publishes propaganda crap like this for the illiterate masses? “Dishonest journalism” is too frequently redundant.

  59. [...] Both have been dissected by multiple sources already (NakedCapitalism, Denninger,) but I thought Barry Ritholtz’s explanation of the truth was the simplest. Looking just at early TARP repayments means that we are ignoring a) the rest of the TARP; and b) [...]

  60. AFatPanda says:

    Cut the writer some lack. He is from the NY Times. What would he know about calculating a profit.

    ~~~~

    BR: Many people don’t know that the headline writer is usually a totally different person/editor than the author of the article!

  61. DeDude says:

    Clawback; I agree that it is a bit unsetteling that you cannot judge to what extend they are “protective liers” or “clueless fools”. The thing that makes me think that they will not allow us to repeat the Japanese experience is that they should have enough brainpower in the larger economic council to understand what happened in Japan. Furthermore, the solution in the autoindustry included a fair amount of hurt to both unions and financials, so they are able to dish out some pain, even to their supporters. So I am tilting toward the view that they are not dishing out pain to the banks now because they are afraid that it’s to early, and the economy is still to fragile. But only time will tell if I am to optimistic or you are to pessimistic. I agree that with Citi they could get into the “old clunker” trap and keep throwing good money after bad, but I doubt that it woud be politically doable to give even one more infusion to Citi.

    I think the reason that a lot of the leaders of finaincials didn’t react to the information about risk was standard psychology. When you are faced with taking a bad hit now or risk a very very bad hit later, it becomes easy to imagine that the things you hear are not true and that it will all be good. I mean that was pretty much the story since 2006 lots of people predicted the crisis, yet very few acted. I seriously doubt that the lack of action was because they were convinced that the government would soften the blow with a bailout package. Its not like the bailout was a sure thing sailing through congress, or that it took ALL the pain away and restored the world to the wonderful days of the past. If you were 100% sure that things would happen the way they did, you would have done much better by being on the other side, than by staying a getting bailed out.