Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.


I find it really depressing that I have to write this. But it seems I have to write it.

Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back.


Suppose you buy fire insurance from Inflammable Insurance. You pay $1000 for a year of insurance. There is no fire, so you make no claim. Next year, you find a different provider offering a better price, and you switch.

Soon after your relationship has ended, you discover that Inflammable failed to pay any claims at all during the year you were insured, because all customer premiums were diverted to the Cayman Islands and then spent on kiddy porn and Pez. Were you defrauded? Do you have any cause for complaint? After all, ex post your cash flows turned out to be the same as if you had been dealt with fairly.

Of course you have been defrauded. You did not get what you had paid for. You had paid for Inflammable to bear risk on your behalf. It did not do so. The money you paid was simply stolen.

In financial markets, risk-bearing is the ultimate commodity. It is what financial market participants buy and sell. As a financial speculator, I spend exorbitant amounts of money buying out-of-the-money options to limit my downside risk. The vast majority of those options expire worthless, just like the vast majority of fire insurance policies end with no claims paid. If only someone would give me all those options for free, or sell them to me for half the market price, or reimburse the cost of the options that I never end up using, I would be rich. Seriously, given the years I’ve been in this game, I’d be pretty set if I had my option premiums back. It doesn’t seem fair at all that I am confined to a modest middle-class life because I had to buy all this insurance I never used.

Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control.

But still. Everything worked out, right? It turns out that banks didn’t need to use the government’s giant insurance policy. It was just a panic after all!


Suppose my kid’s meth habit got the best of him. He’s needs to come up with $100K quick or his dealer’s gonna whack him. But he’s a good kid, really! Coulda happened to anyone. So I “lend” him the money, even though he has no visible means of support and the sketchiest loan sharks in town wouldn’t give him the time of day. Now I believe in bootstraps and hard work, individualism and self-reliance. So I tell my son. “Son, you are going to pay me back every penny of that loan. You are going to work it off. I have arranged with one of my golf buddies, a guy who owes me a favor or three, a job that pays $200K a year. You’d better show up every day at 9 a.m. and sit behind that desk, and get me back my money!” And he does! After a year, he’s made me whole. What a good kid.

No bail out, right? He paid me back every penny! Worked it off!

Bullshit. The opportunity I provided him, the $200K job that he would not otherwise received without my intercession was a huge grant. On the open market, if I were to accept bribes from the highest bidder to wangle the job from my friend, that opportunity would be worth more than the $100K advanced. I paid my son’s loan with my own money. I just obscured the cash flows, so my son and I can pretend and sustain our mutual self-regard and our righteous disdain for the moochers and the hippies and the riff-raff.

After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like paying unwinding AIG swaps at 100¢ on the dollar. It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they controls (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues. (If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)

Pulling back from a shell game whose details are, by design, labyrinthine, check out the big picture. Since the beginning of the 3rd quarter of 2008 (Lehman quarter), US debt held by the public increased by 84%, from $5.28T to $9.75T (as of the end of Q2 2011). Depending on where you start, the growth rate of publicly held US debt prior to Q3 2008 had been ~8% per year (starting in 1970 or 1980) or ~4.5% (starting in 1990 or 2000). The growth rate since Q3-2008 has been 22.6% per year. The United States has issued between $3T and $4T more debt than would have been predicted by any reasonable estimate prior to the financial crisis. So far.

Hyman Minsky famously described crisis stabilization as a two-step process: First, the state/central-bank steps in as lender of last resort to halt the panic. Then the state must underwrite a program of massive deficit spending in order to “validate” — Minsky’s word — the fragile capital structures and the “innovative” business practices that proliferate during periods of tranquility.

Translating into current buzzwords, when the trouble begins there is a solvency crisis. It is converted into a liquidity crisis ex post by a firehose of net spending by the state. The current crisis has followed Minsky’s script perfectly. Banks’ ability to “pay back” bailouts has depended upon continued regulatory forbearance, tacit expectations of support if shit hits the fan again, and massive government debt issuance which resuscitated assets that would otherwise be worthless.

But who has lost anything from the bailouts? Wasn’t it a win-win? This all sounds very abstract. Where are the transfers?

If the government borrowed or printed a trillion dollars and gave the money to me, would there be any losers? If you don’t think there has been a wealth transfer, if you don’t think ordinary people have lost, please call your Congressperson and ask her to cut me a trillion dollar check. In some abstract sense, this policy of giving me money would push government debt higher. But that is so very vague a cost! I promise I’d do great things with a trillion dollars. My ideas are so much cooler than Goldman Sachs’, despite all the wholesome commercials they are running.

During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest. Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran). The market cap of the 19 TARP banks that received more than a billion dollars in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion). The uninsured debt of those banks is and was a large multiple of their market caps. Had the government resolved the weakest of those banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars. We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers. Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.

The banks were bailed out. Big time.

Category: Bailouts, Think Tank

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.

9 Responses to “Yes, Virginia, the banks really were bailed out.”

  1. Rick Caird says:

    Not only did the Fed arrange risk free arbitrage for the banks, it did so by destroying the income available to people who relied on CD’s. It was a win for the banks and a loss for taxpayers and savers.

  2. theexpertisin says:

    The yell outs that the banks were bailed out big time is old news. Really old news. Time will tell if this unfortunate, some say criminal, lesson was learned.

    Perhaps we can move on, maybe to a discussion on how government regulations are killing job creation.

  3. Outlier says:

    The banks were hanging off a cliff about to fall. US government throws them a rope they use to climb to safety. They give the rope back and call it equal…

  4. Greg0658 says:

    pass on the koolaid .. the bottom line is > is that what you call labor ? worthy of a paycheck ?
    so hense > a warm home a steak & a beer

    worse yet considered GDP for America ? bah humbug

    (oh before submit) > and the payback came from ? whos labor ?
    smartest guys* in the room > ya right

    * coda – actually yes – do as little as possible and get paid for it – the American Way
    1/4% levered upwards to 600% – can you say Check into Cash – booyah

  5. ByteMe says:

    And the alternative to the bailouts…. how much in insured consumer deposits would have been lost on bank failure because we repealed Glass-Steagal ten years earlier? Would that money have ever been paid back? Nope.

    Not saying that they shouldn’t have strung up the boards of the banks that needed TARP and then shot them full of lead for good measure. Just saying that there needed to be a way to keep consumers from worrying about their deposits — which was insufficiently insured by the FDIC’s for a system-wide failure, so taxpayers would have been on the hook for the rest — and TARP was what Paulson and Bernanke decided was the fastest way to get past the crisis.

    That bondholders also got bailed out to 100% was stupid, but with all those government insured pension funds also invested in bank bonds, not sure how letting bondholders get a haircut would have played out with costing taxpayers anyway.

  6. Francois says:

    theexpertisin Says:

    “Perhaps we can move on, maybe to a discussion on how government regulations are killing job creation.”

    Perhaps the expert in parroting BS-based talking points should move over and let those who live in a fact-based world to do the thinking.

  7. theexpertisin says:


    To date, this year alone, fed regulations have caused over 8500 jobs to dissappear or not materialize due to federal intrusion in my county. Wooden piers for cargo cannot be built. Fishing is curtailed (needlessly, to those who are practitioners), a small swamp cannot be drained (most of our county is swamp) for industry.Cement companies are told they cannot produce: cement!

    Many employers are fed up with over-reach of the feds and the regulatory pile-ons. How do I know this? I ask them and get an earful. No “BS-based talking points” from these folks.

    The fact that you are oblivious to the harm being done by regulations beyond reasonable indicates that you cannot comprehend the problem – or be a part of the solution.

  8. Francois says:


    I’ve heard business owners complain about regulations since I was 5 y/o; my dad was one…in the province of Quebec, no less. Now, THAT was a socialist paradise back then.

    The key point here is: How is it remotely possible that regulations, which ALMOST NO ONE was complaining about very loudly under Bush, suddenly became THE biggest impediment to any economic recovery? Like, all the federal agencies suddenly got the green light from Brotha Obysmal to regulate the hell outta everyone and his mother? Yeah right! Tell that to the OIRA honchos and Cass “Balls of Brass” Sunstein.

    Answer: It’s not possible, except in the fantasy world of the GOPers and their media lackeys. Of course, if the media keep parroting it all the time, what do you think will be on the mind of any business owner?

    That’s right! These damn regulations!

    Yet, serious surveys place regulations in the middle of the list of preoccupations of businesses, who are MUCH MORE preoccupied by a chronic lack of demand.

  9. theexpertisin says:

    Surely you jest, Francois.

    I and others facing abusive regulations trumpeted by faceless, agenda driven bureaucrats live in Realville.

    Folks abstracting surveys and experts from afar live somewhere else: The City of Elite.