The Treasury Department (and their defenders) insist the bailouts were good investments. The following almost true story might provide some insight into how true that argument is.


George and Martha, a wealthy older couple, comes into my office. They are not happy with their current stockbroker. Concerned about their future, they ask if I would have a look at their portfolio.

Certainly, we do these reviews all the time. As it turns out, this review would be very different from what I am used to. We sit down to discuss their investments, and perusing their 12-figure account, I almost fall out of my seat. The portfolio is festooned with every risky stock of the past five years. I have to restrain myself from sarcastically asking “What, no Facebook IPO shares?

Instead, I simply say “Please tell me a little bit about yourselves.

“We grew up hardscrabble, were self-reliant, always helped out our neighbors.” They are hard working people, and their wealth was accumulated after the war. They tell me they diligently built a portfolio of hard assets – gold, real estate and bonds. They took appropriate risk, were frugal in their spending, and diligently saved money.

It was perplexing. What they were describing about their approach to saving and investing was nothing like the portfolio mess I was looking at.

And oh, what an unholy mess it is: Many of the highest risk, lowest return assets ever to grace a broker’s pitchbook fills their portfolio. Sketchy private equity deals, dubious preferred stock, low rated corporate bonds.

I could see why they are not happy with their returns. The pattern that emerges from my brief review reveals their holdings were the biggest names from the financial crisis: AIG, General Motors, Citigroup, Bank of America, GE Capital, Fannie Mae, Freddie Mac, GMAC. There’s even a venture capital deal in the mix, some solar energy firm named Solyndra that had gone bust.

Can you tell me something about the brokers who put together this portfolio?” I ask them?

Their portfolio was created by the firm of Paulson & Geithner Capital Management. The approach takes lots of significant of risk, but has hardly generated any payoff for these investors.

I ask them “This is a risky portfolio for folks like you. What was the thought process behind this?

Things changed a bit after the dotcom crash, they said, but they really went off the rails during the financial crisis. Their broker then was a Mr. H. Paulson, and he oversaw the major changes to their holdings. In late 2008, he began pushing lots of private deals with banks and finance companies. He warned them that this was absolutely necessary, and if they did not do this, there might be serious consequences.

He really scared us into these investments. We never wanted to get involved with these positions. Initially, we turned him down. But he told us that all sorts of terrible things could happen if we didn’t do this. We deferred to his expertise.”

George and Martha eventually relented, and Paulson made wholesale changes to the portfolio. He was very reassuring, and kept insisting this was painful but necessary, and it would all work out for the best.

Only, not so much. Their portfolio imploded.

Soon after, Paulson retired. Then the new kid came in. His name was T. Geithner, and he took over as their broker, managing their assets. He was younger and much slicker than Paulson. He seemed to be “fast-talking” them, insisting they were making huge profits on Paulson’s investments.

They couldn’t see what he was talking about. “No, no you are doing great” Geithner kept insisting. But the numbers never seemed to add up. If this was such a great investment, why hadn’t they even reached breakeven yet, nearly 4 years after Paulson stepped down?

Look, this isn’t going to be pretty.” I said. “But let me give you the straight dope.”

I began to go over the ugly details.

You’ve been tag-teamed – it’s an old school technique, and its still effective. The old man sold you high risk junk, the new kid come in, keeps insisting it’s a great investment.” The handoff is a classic sales con, and these folks were slowly realizing they had been had.

Let’s start with the good news: this isn’t the worst portfolio I had ever seen.” Its just that it isn’t particularly good.

First up is their bank holdings – a collection of preferred stocks, corporate loans and private equity deals. Through a series of negotiated transactions, they owned Goldman Sachs, Morgan Stanley, PNC, US Bancorp, Suntrust, Capital One – the list went on and on. Hundreds of investments in various banks and insurers. In nearly every case, the bonds had been called, the outstanding principal repaid. Most of these showed modest single digit profits.

None were particularly good deals. The returns were mediocre on their face. Once you factored in risk, there were pathetic deals. I didn’t tell them I suspected a conflict of interest was why the deals were so generous to the banks and so poor for the investors.

Understand what you did here: You made very high risk loans to very shaky banks at a time when no one else would have done these deals. An honest fiduciary could have negotiated a very advantageous deal, demanding both a high interest rate and a healthy chunk of equity. These trades should have been 5 or 10 baggers, but instead, your broker cut deals that was barely better than breakeven.”

To put that into context, over the same period, the S&P 500 was up nearly 100%, Gold more than doubled and Bonds were having their best decade ever. Even worse, these breakeven trades were their best investments.

We continued down the portfolio. “You own enormous amounts of Fannie Mae and Freddie Mac. These are giant losers, and the bleeding continues even today. I would never have bought these, and I would recommend you jettison them right away.” A bizarre note structure worked like were open-ended Futures contracts that never expired. They had no limits on the losses – like shorting a stock that goes up forever, the losses here were potentially limitless.

We went down the list. Chrysler (big loser). General Motors (even big loser). Bank of America and Citigroup (enormous risks for only a modest gain). GE (Breakeven).

We moved on to the next holding: AIG. This was an extremely reckless investment that came with accounting shenanigans. “The paperwork makes it appear that you made a profit on this investment, but look at this footnote. You waived a significant dividend from them so they could take a phantom tax loss.” What appeared to be a modest profit was in actuality a giant loss. “Whoever prepared this statement was not being honest with you. You still are off about 25% of the original investment.”

Oh, and there was another problem with some of these investment: Liquidity. “You guys are buried in your General Motors and AIG holdings. You own about 26% of the float of GM, and nearly half of AIG. If you needed to sell this quickly you would crush the stock.” It was 4 years later, and he had barely worked out of half their position.

The enormity of what occurred begins to register on their faces. It was time to deliver the bad news.

Look, let me bottom line this for you. These accounts made extremely risky investments, at a time when no one else was willing to put up this kind of money. You put an enormous amount of capital up for very little returns. Your brokers failed to negotiate half decent deals – its as if they were working for the banks, not you. You should have been paid handsomely for this, and you are not even break even across most of this junk you bought. Had you simply put your money into an index fund or bought bonds, you would have significantly outperformed all this stuff – with appreciably less risk.”

The meeting ends, and they get up to leave. I share one final thought with them:

I don’t know what the original goal of this portfolio was supposed to be, but generating a return on investment does not seem to be its objective. The nicest thing I could say, is given the circumstances, it could have been much, much worse.

With that they thank me, and leave my office.


Its fair to say that the massive liquidity the bailouts provided helped stabilize a financial system about to fall into the abyss. It is not accurate to in any way call these good investments. This narrative was designed to counter that silly argument amongst the bank apologists.

George & Martha (as in Washington) represent the American taxpayer, in case that was too subtle.

To track out all of the money returned on these “investments,” check out Pro Publica’s Bailout Tracker.

Category: Bailouts, Investing, Really, really bad calls

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.

27 Responses to “How Good an Investment Were the Bailouts?”

  1. BennyProfane says:

    12 figure account? wow.

  2. Expat says:

    I am amazed that no one is questioning how the banks have managed to “pay back” all the money they received (Paulson and Geithner shills proclaim how TARP is all repaid and with a profit!). Supposedly the banks were on the brink of destroying the known universe with the size of their losses. They were gone, bankrupt, decrepit, and forced to change their way of life.

    Then, a few years later, these same banks miraculously manage to pay back tens upon tens of BILLIONS, post huge profits, and pay massive bonuses. Models and bottles, baby!

    Isn’t anyone asking pointed questions about how they can generate so much money? Why can GS or BOA supposedly earn tens of billions while the economy sucks.

  3. Liquidity Trader says:

    Dude, this is awesome — nicely done.

  4. Rightline says:

    It was a 12 figure account. However, net of debt, it is much less than that now….

  5. sharpie says:

    Not really a fair analogy, is it? The government did not dole out this money as a money-making investment but to keep the financial system, and the entire economy, from crashing. What’s $175B compared to the 2 or 3 or 4 TRILLION we spent on the Iraq War? Not to mention that 80% of the loss to date is from Fannie and Freddie, GSE’s for which the government provided an “implicit” guarantee. Coulda been a lot worse, indeed.


    BR: EXACTLY. That’s why Treasury (and others) need to stop talking about this like it was as an investment — it was to rescue the system, not deploy capital for returns.

  6. vv111y says:

    Ha! Good one Barry. Nailed it.

  7. Orange14 says:

    BR – Simply outstanding post!

  8. Greg0658 says:

    1st made me google “Paulson & Geithner Capital Management” – wondered when they were a ‘shop’ under that name – if M&A’d into/outof space .. searched little or it was another metaphor

    2nd and why I bothered to sign in – the story seemed like a real walk-in – until the very end when you inform us Geo & Martha are vanilla taxpayers

    “even a venture capital deal in the mix, some solar energy firm named Solyndra” ..
    yes real work for j6p building it and then bill&brenda too – managing the breakup assets back into the useagain shops … that hit made me wonder what it is to be in the shoes & hat of a Paulson & Geithner Capital Management shop .. and Geo & Martha’s fit in the mix – for man and/or country

    the jist of it all – the complexity of this new age – return on/of worked for dollars to retire with – who to trust, what to trust .. free to move about cash & speech and all .. change must come from the bottom up, loose lips sink ships, then the drowning folk will work together .. aka ‘kick in the pants’

  9. crutcher says:

    Awesome post – grist for your WP gig I hope.

  10. gordo365 says:

    Oh damn. I’ve cut and paste this and forwarded to a bunch of friends saying “you have to read this!” I promised myself I would never do that…

  11. vincible says:

    Great work, very scathing. But I might add that running a country is not like running an individual portfolio.

  12. Chad says:

    Arrrgghhh….don’t cut and paste stuff in emails, that demonstrates your age. I get tons of this stuff from Boomers and older. It suggests a less skilled computer/internet useer. You really need to include the link, as without the link the email appears to be pure spin at best or an outright lie at worst.

  13. SolAU says:

    This kind of thing can happen to anyone who deals with the financial industry and impacts people across all wealth scales, predatory lending before the housing bubble was arguably quite similar. Its simply people receiving financial advice from people who are in a position to take advantage of their lack of knowledge.

    People with significant assets are potentially more profitable targets and a lot more effort will go into trying to take advantage of them. Its a shame such abuses are hard to prosecute.

  14. Tim says:

    This story deserves to go viral. Paulson & Geithner Capital Management — sheeesh.

  15. jrnbj says:

    A bizarre note structure worked like were open-ended Futures contracts that never expired.

    (public editing…my apologies)

  16. DeDude says:

    Agree it is a very bad idea to talk about “return on investment”. The “return on investment” for saving the economy is a saved economy. The “return on investment” for making sure that there is a market for house loans (rather than all transaction being all cash), is the fact that there is a market for house loans. That is different from concept of actual investors getting “return on investment”.

    They need to stop talking about this as investments and instead talk about it as actions to save the financial system from collapse and to save the house mortgage system from collapse. I know a lot of people think that they should just have let it all collapse and we would all be better off now. But the data from previous collapses do not support those dreams of fast and magic recoveries automatically appearing after a huge downturn caused by a financial crisis.

  17. LizSunValley says:

    In the case of B of A, the way they paid back the TARP loans was to lay off 30,000 +/- employees, usually bankers in small towns (where they wouldn’t have to report the layoffs, because they were below the 50- person reporting limit), who were performing old-fashioned, client-service-oriented banking functions: making good loans and taking deposits. (The highly-paid brokers, traders and management in the big cities were not affected by the layoffs–no surprise there–they even continued to receive large bonuses.) B of A laid off these middle-class folks even when the operation was modestly profitable, as it was here in Ketchum, ID. With a sharp drop in expenses due to layoffs, B of A was able to show instant profits, their stock price went up, and they paid back the federal government.

    I know this is the case because we lived it–my husband, a very well-regarded, modestly-paid B of A banker and member of the local community, was one of those thousands who were laid off in early 2009 thanks to TARP, as was his assistant–literally for no reason at all. So–paradoxically–TARP INCREASED the local unemployment rate, and from my first-hand perspective, was a very bad thing for Main Street, USA and the middle class.

    I wrote about this in a comment to the NY Times shortly after it happened–it was the crux of what was wrong with TARP, and deserves a look, Mr. Ritholtz: )

  18. b_thunder says:

    First and foremost – where the heck is Ben Bernanke in all this? Without Ben this portfolio would be worth no more than 4-year old lottery ticket!

    Second, “Your brokers failed to negotiate half decent deals – its as if they were working for the banks,” — AS IF??? Who the heck do you think Paulson and Geithner really work for? They may claim to be “civil servants”, but on a subconscious and semi-conscious levels their brains are 100% Wall St – centric. For them the the Wall St is the center of the universe, the “sun”, the power center that shines brightest and illuminates and gives life to the rest of the economy.

    Third, who’s going to make things right? Is there a sheriff in town? Obama doesn’t seem to be very interest or very competent when it come to getting the truth. he’s ok with giving jobs to peopel who are willign to misrepresent the reality, as long as it gives him better shot at reelection. Mary Schapiro, Tim Geithner, the Big Banks’ former and future consigliery Eric Holder? I also doubt that whoever Romney picks to replace this crew will be any better…

  19. wally says:

    “Its fair to say that the massive liquidity the bailouts provided helped stabilize a financial system about to fall into the abyss. It is not accurate to in any way call these good investments.”

    There is an inherent contradiction in those two sentences. Yes, I understand the point the author is trying to make… but on the other hand, it is wrong to NOT call them good investments if they actually did stabilize the financial system and keep it from falling into an abyss.


    BR: You understand how people are misusing those dual definitons on purpose, right . . . ?

  20. carleric says:

    I strongly disagreed with the entire bank bailout….too big too fail? Bulls**t…when Bennie made Goldman a 100% beneficiary of a very bad investment, did this save the system? The facts seem to be that the entire process was developed to save their banking buddies and the American taxpayer was sold a bill of goods….the system was going to fail…a few (several?) of Paulson, Timmy and Bennie’s buddies would be broke and out of work so they frightened the weak sisters of our populace into going along. Where was that one man that would stand alone and say F**k ‘em….let them eat cake. And anybody who thinks the taxpayers will ever get their money back is a damned fool.

  21. [...] How good an investment were the bank bailouts?  (Big Picture) [...]

  22. Moss says:

    Should this not be a case study in Opportunity Costs? The next best alternative foregone. They had to do something and it ended up being massive bailouts. When they did not let Bear go bankrupt the Lehman geniuses thought they would be bailed out as well.

  23. AnnaLee says:

    And I thought BR was building up to tell all of us old Georges and Marthas what we can do to make our money survive in a Paulson-Geithner world.

  24. ttranfa228 says:

    If your point is simply that they were bailouts and not an investment, fine.

    What would be a lot more illuminating is an analysis of what George and Martha would have lost if they didn’t do the bailout. You left out a few facts, such as, whether you like it or not, George and Martha had already led the world to belive that they were guaranteeing $5trillion of fannie/freddie debt. And oh yeah, that George and Martha knew that the management of those companies was inept but kept them in place anyway. And how many trillions of bank deposits had George and Martha guaranteed? So though the bailout critics (and i have many criticisms) like to pretend that the govt. got involved on March 17, 2008, there were decades of errors made before that day.


    BR: 1. My position is that prepackaged bankruptcy, with the Fed providing liquidity and US GOvt providing Debtor-in-possession financing was the proper way to go. Gifting billions to the banks was a moral hazard, inefficient and simply the wrong way to go.

    2. Some people keep rationalizing the above errors by claiming “Hey, it was a good investment!” This piece shows that a) thats the worng standard and b) no it wasnt a good investment.

  25. ttranfa228 says:

    Fair enough. I agree. I just don’t think they could have let the whole thing go down, as many say they should have.

  26. [...] Barry Ritholtz points out, the bail-outs weren’t good investments at all; here he writes about [...]

  27. [...] Barry Ritholtz has an amusing post that looks at the bailouts of AIG, GM, Chrysler, Citigroup, and Bank of America from the point of view of an investment counselor looking at the portfolio of some new clients: George and Martha, a wealthy older couple, comes into my office. They are not happy with their current stockbroker. Concerned about their future, they ask if I would have a look at their portfolio. [...]