There has been a steady drumbeat from the Treasury Department as to what “successful investments” the bailouts of Wall Street have been. This morning I’d like to broadly consider that by discussing a few key points that I have yet to see addressed.

Namely, that these were not investments, but rather they were systemic rescues. If you are going to judge how successful they were, you have to do so under the proper framework, and by looking at the entire picture. Merely asking if taxpayers got their cash back is not remotely the correct analysis.

If the purpose of the bank/AIG/automaker/GSE rescues were to save the economy from falling into the abyss, than that is the framework one should use in evaluating if they were successful. What wer ethe costs, risks, and long term effects these rescues had. It is a fair to also consider what alternative rescues would have looked like, cost, and whether they might have worked. Looking at whether alternative rescues were cheaper and more effective is a legitimate a counter-factual inquiry.

The short answer is Yes, we avoided financial Armageddon — but at a cost.

It seems many folks want to evaluate these bailouts under a different framework as investments. I believe that is an inappropriate measure; however, if you insist on judging these as that way, than we best evaluate them properly as such. In my opinion, as investments, they were handled poorly, negotiated terribly, took extreme amounts of risk, and delivered radically under-performing returns.

Regardless, we continue to see from Treasury Secretary Geithner, and more recently from NYT columnist Andrew Ross Sorkin, an unfortunate tendency to conflate these two different measures: “We rescued the system, AND got all of our investment back. Yeah!”

This is disingenuous. It does not consider ALL of the costs of the bailout, nor does it judge the “investments” properly as such. (I’ll have more coming on this Sunday).

When one evaluates how successful anything is, it helps to understand what the original goals of that project were. Here is where we run into a major problem, as those goals have morphed over time — flailed really — from one set of objectives to another. The initial goal was to prevent another Great Depression, to stabilize the financial system, That then morphed into saving the banks, and rehabilitating their balance sheets. Next, stopping the freefall in Housing and providing some relief to borrowers. Lastly, the entire process has been dumbed down to the point of “did we get out money back?” — as if that was the primary purpose of this “investment.”

Did the taxpayers get their money back? is the wrong question. There were many costs, past and ongoing, that the economy had to bear to pursue these rescue plans. The taxpayer (aka the US government) assumed a tremendous amount of risk, provided bailout funds at a time when NO ONE ELSE ON EARTH WOULD OR COULD, created an enormous moral hazard, and rescued bond holders — at 100 cents on the dollar — when they did not deserve any such rescue in a capitalistic system.

By most measures, the Bailouts did stabilize the system, and prevented another Great Depression (so far). I do not think any fair minded critic will disagree about that. However, there are legitimate criticisms of the societal costs of these bailouts, about the collateral damage that it wrought. We still have an ongoing propping up of banks, ZIRP, and other lingering effects.

By the numbers, ProPublica informs us that taxpayers are still owed $27 billion for GM, $2.3 billion for AIG, $91 billion for Fannie, $51 billion for Freddie. While some people point to a net gain of $19 billion for the Wall Street bailouts, you can only reach that number by ignoring the nearly $200 billion that is still owed.  (See Pro Publica for more info)

All of these areas are ripe for greater exposition. Look for more on the full costs of the bailouts later this week . . .

Category: Bailouts, Really, really bad calls, Valuation

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.

21 Responses to “Did the Government Bailouts Work & at What Cost?”

  1. iamtheonepercent says:

    The biggest cost is yet to be paid – and it is societal, not financial.

    Because the TBTF banks and AIG were bailed out, and no one was prosecuted, there is a growing sense that whole system does not work for ordinary Americans. This has spawned the Occupy and Tea Party movements. This sense of unfairness has reduced the likelihood of political compromise along class and party lines, and has migrated the narrative of this crisis from normative economics to morality and class warfare.

    When the Fed’s pushing on a string fails (QEx) to make a serious dent in unemployment, and the federal government fails to do anything constructive, we’ll enter a phase of prolonged financial repression — i.e. inflation with low nominal interest rates (thus negative real rates) — to reduce the debt burden. There are several important differences with the post-WWII era that will make this era of financial repression more destabilizing, including:

    1) No demographic dividend to fuel GNP growth
    2) Large baby boomer generations’ savings will be eroded, requiring more government transfer payments in future
    3) Debt overhang is held by households this time, not governments, so credit re-expansion will be very slow, as negative rates will not restore solvency to indebted households very quickly.

    Worst case – widespread civil unrest and societal breakdown – leading to some unknown and most likely undemocratic future. Best case – a decade of stagnation, resulting in a lost generation of youth that will have permanently depressed income due to low labor force participation and eroded human capital, followed by decades of impoverishment for the Boomers in retirement.

  2. normal1 says:

    All these areas are also ripe for greater exploitation by politicians during this election year. Complicated arrangements are always ripe for the spin-doctors to work their magic, filtering information to suit their message.

    For example, Ohio politician Josh Mandel is running ads stating “Every Democrat and every Republican who took our tax dollars and used them to bail out Wall Street banks was dead wrong. It was fiscally irresponsible. It was morally wrong.” Way to ignore those tedious details, Josh, that may go against conventional wisdom, and just pander to the crowd. It’s like the loser in a game declaring he actually won, and going with it. Or John Belushi’s ‘Nazis bombing Pearl Harbor’ speech in Animal House; message is BS, but the messinger was sincere, making you WANT to support him.

    Anyway, I see the two main taking sides, one pro bailout, one anti-bailout. The Republicans successfully squashed the libertarian “uprising” by labeling them as radical tea-partiers, so the crony capitalism charges have been buried, at least for now. We’re back to what we’re comfortable with: Dems want socialism and Reps want capitalism. And, with the glut of information out there, it’s nice to know that some things are constant, right?

  3. constantnormal says:

    Was the GM “bailout” really in the same class as the others?

    As I recall, GM’s stockholders were essentially wiped out, the bond holders took (at least) a haircut, and top management was fired.

    Barry, did not you advocate the Swedish bank treatment for our banks? How did what GM got differ from that?

  4. nofoulsontheplayground says:

    The GM situation should have been handled via a pre-packaged bankruptcy with the US Government providing the Debtor in Possession financing. The government involvement has made the reorg more of a zombie entity than a complete rebirth while making a mockery of the creditor heirarchy.

    I would have been OK with the government takeover of AIG if they had declared a moratorium on Credit Default Swaps while making any new swaps regulated no differently than insurance policies. We would have been done with naked CDS’s in the US by now if that had been done.

    The government takover of AIG should have ended the writing of naked credit default swaps as well as starting a 5-year wind down of existing swaps.

    I don’t believe there was a solid alternative to the government takeover of the GSE’s, as they had been quasi-guaranteed. Much of QE1 was more or less an agreement for the Fed to purchase GSE paper from foreign (mostly Chinese) entities in exchange for their purchases of new Treasury notes. QE1 helped calm the nervous foreign bond holders and stabilize that US debt market.

    As for TARP for the banks, I believe most of that should have been handled through the FDIC or a resolution trust type entity. Too bad Bill Seidman was too old at the time. He could have been a great point person for this situation because of his stellar performance as the head of the Resolution Trust Corp during the S&L crisis.

  5. silverfox8028 says:

    The REAL cost of all the financial shenanigans were the billions and probably trillions lost by mostly the elderly who in the past got $5-$6,000 for every $100,000 invested in the Money Market. Now they get a few hundred dollars and are living on “dogfood.” They better get use to eating it because this is going to last for another 5 years or more.

    The Fed should’ve left it crash in 2008, guaranteed all bank accounts regardless of size, guaranteed “letters of credit” and whatever else to maintain the REAL economy…but let everything else adjust accordingly. TBF banks would be gone along with most of the 0.1 percenters…asset equalization accomplished.


  6. The Retired CNBC Sucks says:

    Let me preface this comment by renouncing my decision back in June to vote for Romney. On the day that he picked Paul Ryan, I switched back to President Obama because there is no way I am letting Art Laffer finish his mission of killing America.

    In terms of your post, I get it and I have always gotten your sensibilities, Barry. They are unwaveringly forthright. Now get mine. The “investment” was not an investment in America but an investment in President Obama’ re-election. Sure there were moral hazards left and right and “taxpayers” could have gotten more for their money, but in reality, those moral harards amounting to billions pale in comparison to all the moral hazards America has taken on its way to $16 trillion in federal debt. “Taxpayers” did not really pay for bailouts and it is doubtful they ever will; creditors did and will likely be repaid by future American consumers, not taxpayers. All your criticisms are valid on an absolute microeconomic level, but on a relative macroeconomic level, your numbers are a pittance and serve to make a very dark future only a little bit darker.

  7. AHodge says:

    im not buying the AIGmoney back
    it would be so easyand necessarybefore Nov to lie
    who is in chargeof the analysis and narrative?
    id like to see AIG reverse 20/1 stock splt results
    and what govt still own? they are NOT out completely
    we needed rescue in 08 09 real bad

    the total package was
    1commercial paper and money market guearanteessept 2007
    2QE 1
    The Sept 2007fannie freddie rescue and guarantee that cost $180 bio and will cost say 450 billion more?
    3TALF, fed mortgage buys and other asset buys we still own
    4we own stuff like capitalized future insuranc e promiums in TALF
    5the basic stimulus and tax cuts, about half for business
    youshould see what the tax loss carrybacks are ding to current corp profits receipts
    the $700 billion TARP of Oct 2007 that was switched to bank and auto co bailout and AIG

    roughly in order of importance?

  8. Mike.R says:

    So Citi returns $57B on $40B, great “investment”, that’s a 1.3x return multiple and 18% IRR according to my last calc. But if it’s a “rescue” don’t you have to consider the $2.4 trillion in secret loans from the federal reserve? Add that to the cashflows for about 6 months or so (just a guess) and your “rescue” returns are 1.00x and 1%.

  9. “…This is disingenuous…”

    dis·in·gen·u·ous (dsn-jny-s)
    1. Not straightforward or candid; insincere or calculating: “an ambitious, disingenuous, philistine, and hypocritical operator, who … exemplified … the most disagreeable traits of his time” (David Cannadine).
    2. Pretending to be unaware or unsophisticated; faux-naïf.
    3. Usage Problem Unaware or uninformed; naive.
    disin·genu·ous·ly adv.
    disin·genu·ous·ness n.
    Usage Note: The meaning of disingenuous has been shifting about lately, as if people were unsure of its proper meaning. Generally, it means “insincere” and often seems to be a synonym of cynical or calculating. Not surprisingly, the word is used often in political contexts, as in It is both insensitive and disingenuous for the White House to describe its aid package and the proposal to eliminate the federal payment as “tough love.” This use of the word is accepted by 94 percent of the Usage Panel. Most Panelists also accept the extended meaning relating to less reproachable behavior. Fully 88 percent accept disingenuous with the meaning “playfully insincere, faux-naïf,” as in the example “I don’t have a clue about late Beethoven!” he said. The remark seemed disingenuous, coming from one of the world’s foremost concert pianists. Sometimes disingenuous is used as a synonym for naive, as if the dis- prefix functioned as an intensive (as it does in certain words like disannul) rather than as a negative element. This usage does not find much admiration among Panelists, however. Seventy-five percent do not accept it in the phrase a disingenuous tourist who falls prey to stereotypical con artists.

    The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000

    disingenuous adjective artful, artificial, counterfeit, crafty, cunning, deceitful, deceiving, delusive, delusory, designing, devious, dishonest, dodging, evasive, false, false hearted, feigned, fraudulent, hypocritical, insidious, insincere, lacking frankness, lying, mendacious, misdealing, misleading, parum candidus, prevaricating, scheming, shifty, sly, spurious, tricky, truthless, uncandid, underhanded, unethical, ungenuine, unprincipled, unscrupulous, unstraightforward, untrustworthy, untruthful, wanting in candor, wily, without truthSee also: corrupt, deceptive, dishonest, evasive, fraudulent, lying, machiavellian, oblique, sinister, tortuous, unconscionable, unscrupulous, untrue

    Burton’s Legal Thesaurus, 4E. Copyright © 2007

    LSS..”It’s a _______ Lie.”

    yon’ Ritholtz,

    certainly, and not to your Discredit, you are, far, more politic than I..~

  10. VennData says:

    ….and the benefits of the the ancillary suppliers etc and the taxes THEY all paid isn’t added in either. It’s a wash. Keynsian demand maintenance wins again.

  11. gfeirman says:

    Good stuff Barry! Clearly you are right about the larger picture of thinking about the sucess/failure of the bailouts. Looking forward to your further analysis.

  12. CharlesII says:

    Looking at IRR, as Mike suggests, is a good way to begin. But if one is going to look at it from the standpoint of the taxpayer, then the full costs to the taxpayer should be considered. Pro Publica did not do that. Those full costs include unemployment insurance, Medicaid, and lost taxes, all of which combined for an autoworker probably amount to upwards of $50,000 (the UE calculator is at,4680,7-118-26831-82227–,00.html#weekly, figure) . While some of these costs (like UE) don’t go on indefinitely, one is looking at a likely cost of $100,000-plus for every worker. And this is ignoring knock-on costs.

    So losing 1 million jobs is very expensive for the government. Losing just $27B is a great IRR. The government has “made” $73B.

    I think it’s fine to consider the money spent on GM as an investment. Just count up the costs of letting it go down carefully.

    Our man from Bain is brilliant at making money by externalizing costs. But is he so good at doing the arithmetic when the shareholders include all Americans?

  13. The Retired CNBC Sucks says:

    IRR? You gentlemen are fine, fine analysts but out of touch with America.

    The American people do not understand IRR nor do they care. What they understand though is if there is a depression, that is “bad”. If Obama nationalizes the banks and can be branded a Socialist more than he already has, that is “bad”. (Socialists are “bad” but Communists are “really bad”.) If real unemployment is at 40% instead of 20%, that is “bad”. If Republicans can throw some crap at Obama and some more of it sticks, that is “bad”. If people are making no money at all instead of $10 per hour, that is “bad”. Sixteen trilion in debt is “bad”, but sixteen gajillion is worse!

    To Americans, the bailout was “bad” but whatever, it wasn’t “that bad” and don’t bother us with these details. And stop with all the finance and math talk, you one-percenters. It makes our heads hurt. Leave us alone to our emo or indie music, FWB sex, and Facebook and Twitter on our iPhones.

  14. [...] Barry Ritholtz on the bailouts; Pro Publica looks at the numbers. [...]

  15. Mr.-Vix-It says:

    Everybody is asking the wrong question. The question we should be asking is if the same exact situation were to occur one year from now or even one month from now, with the added value of hindsight and “clear” thinking, would the policy response be exactly the same or would it be different? In other words, the next time there are serious systemic risks which is inevitable, will the Fed and Treasury do exactly the same thing because this time it was supposedly successful? I wish somebody would ask Bernanke and Geithner what they would do differently if the same circumstances (or worse) were to appear down the line. My guess is they wouldn’t change a thing because they performed the “perfect” bailout. Moral hazard lurks in the future…

  16. eliz says:

    I like the question. I like the discussion.

    Unfortunately, most Americans are too busy, too apathetic, and/or too ignorant to give this any attention.

  17. b_thunder says:

    Profit? The bailouts resulted in profits? Well, i’ve got 3 bullet points:

    1. Since the stock market almost doubled from the time when TARP was started, the hedge fund formerly known as the US Treasury has been massively UNDER-performing.

    2. If dilute the unit of measure (us dollar) enough, just about every investment will show profit on paper. Zimbabwean stock market was the best performing market, remember?

    3. The Treasury says it earned money on the bailout? What that amounts to, $20 per taxpayer? $50? I recall paying under 2 bucks for gas in November 2008. I’m paying $4 now. I was getting 5% on a FDIC insured CD. Now it’s 0.2%.

    Geithner’s and Holder’s (in)actions make it impossible for me to vote for the man who gave them their current jobs.

  18. rolo says:

    Was it GM that was saved, or the UAW?

    $27 billion ‘TARP’ money owed by GM(UAW).
    390,000 active UAW members. 600,000 retired UAW members.
    $27,272.73/per member…Thank You Taxpayers!

    Anyone foolish enough to think GM would vanish under bankruptcy? (Maybe Biden really believes this…)

    At least the millions of bank employees repaid their loan, but were treated as villains in the process while the UAW are treated as heros.

  19. CharlesII says:

    Rolo is wrong.

    The pensions of the UAW would become the responsibility of the taxpayer if GM were to go under.

    Yet another hidden cost of vulture capitalism that socializes the costs and privatizes up the profits.

  20. rolo says:

    Charles 2 : The taxpayer’s $27 bil is largely responsible for the UAW’s pensions.

    I hope you don’t actually think that ‘GM going under’ means you couldn’t buy a new Chevy today, or that the 390,000 active UAW members would be unemployed and the 600,000 retired UAWs would be among the record number of food stamp recipients. Seriously.

    One of my points is that millions of rank and file bank employees (especially regional banks) paid a significant price, financially and socially, BUT PAID THEIR DEBTS, and still are cast as wreckless crooks.

    Spare me the hubris of this administration saving the poor hapless UAW and auto industry.
    As a taxpayer, I want my money back.

    I won’t even address your comment about capitalism.

  21. [...] announces another stimulus plan. The Treasury recovers bailout money from A.I.G. Barry Ritholtz questions the success of government bailouts: “By most measures, the bailouts did stabilize the system and prevented [...]