Yes, Virginia. The banks really were bailed out.

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.

Bullshit.

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!

Bullshit.

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 have 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 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 control (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 each 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 the 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.

Update History:

  • 1-Dec-2011, 7:20 a.m. EST: Light edits: “received more than a billion dollars each in assistance”; “weakest of those the banks”; “that he would not otherwise have received without my intercession,“; “like paying unwinding AIG swaps”; “entities they controls control”
 
 

79 Responses to “Yes, Virginia. The banks really were bailed out.”

  1. [...] back, the banks didn’t “really” get bailed out. Steve Waldman of Interfluidity responds with a metaphor: Suppose my kid’s meth habit got the best of him. He’s needs to come up with [...]

  2. KidDynamite writes:

    Steve – the problem with your last paragraph is the very definition of Too Big To Fail. I would have loved to see the proper parties held accountable: bank bondholders take haircuts, shareholders get whacked: but the problem is that We The People would have taken too much pain, even though we didn’t (and still don’t) understand that. That’s what TBTF is – we all had too much exposure to this crap via pension funds, commercial paper, equity, economy, etc. I very much agree that the hastily crafted bailouts should have had longer lasting consequences: not just “as soon as you pay us back, you can go back to business as usual.”

    As for who the losers are: that’s easy – the PRUDENT people are the losers. Here’s one example: while, in the summer of 2007, Joe Sixpack was relishing his money market yield, I was moving every penny into insured Treasury funds yielding 1/4 of Joe Sixpack’s MM fund. To your point about buying insurance: i “bought” the downside protection – I managed my risk based on what I saw coming: but Joe Sixpack got the benefit anyway, even though he didn’t buy the protection. This example extends beyond money market funds, of course, to other asset classes.

  3. JKH writes:

    Good post, but I think you did yourself a disservice by becoming imprisoned in an implicit struggle for the right definition of “bailout”. That word is hardly the issue.

    The fact that the money was returned is one of the issues. While it doesn’t excuse everything else that might be wrong, that fact shouldn’t be obscured in seeking the truth.

    Perhaps the hypothesis is that the entire nominal GDP decline and all of the associated unemployment is due to bankers. That’s one way of looking at. Debate it. But don’t obscure the fact that the money was repaid to the government.

    All of the “subsidies” you note are reflected on a gross basis as part of the net result in the repayment of the money, so that’s not really a separate issue.

    There is a important issue that I think you did not pay enough attention to. That is the idea of reflexivity in risk. The employment of the government balance sheet as insurance reduced the risk itself. The expected ultimate losses decline due to the mere presence of this type of insurance. Offering the government balance sheet reduces Minsky risk. Policies written by this particular insurance company are reflexive in reducing the risk they insure. Commentators make the mistake of thinking that the risk didn’t change as a result of the nature of the insurance company, even before the premium was determined.

    Are there other problems? Sure. And they’re massive. But let’s be granular about the difference between the government financial results as a small part of the truth, and more fundamental things that are wrong with the system.

  4. [...] Steve Randy Waldman, “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.”  (Interfluidity) [...]

  5. Fed Up writes:

    JKH said: “Offering the government balance sheet reduces Minsky risk.”

    Or is gov’t debt used to attempt to spread the risk out over time (like Japan)?

    JKH, could you explain the supply of loans and banks to Nick here?

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/11/why-has-private-debt-increased.html

  6. Blissex writes:

    And what about “balance sheet” assistance?

    And have you noticed that nobody talks about Maiden Lane?

  7. David Merkel writes:

    Reminds me a little of our trip to the US Treasury:

    http://alephblog.com/2009/11/07/my-visit-to-the-us-treasury-part-5/

    >>After the meeting, I said to one Treasury staffer, “One of the quiet casualties of this crisis is that you lost your last bit of slack from the entitlement systems.”

    “What do you mean?”

    “Just this, prior to the crisis, Social Security and Medicare would produce cash flow surpluses for the Government until 2018. Now the estimates are 2016, and my guess is more like 2014. The existing higher deficit takes us out to the point where the entitlement systems go into permanent negative cash flow. This means that the US budget is in a structural deficit for as far as the eye can see, fifty years or more, absent changes to entitlements.”

    He looked at me and commented that it would be the job of a later administration. No way to handle that now. To me, the answer reminded me of what I say to myself when I go on a scary ride at Six Flags with my kids. There is nothing we can do to change matters. The only thing to adjust is attitude. So, ignore the fact that you are afraid of heights, and enjoy the torture, okay?<<

    I appreciated this post, Randy. Keep up the good work.

  8. mattski writes:

    Kevin Drum recently wrote: “There’s a certain amount of unfairness that’s inherent in any banking rescue, and I can live with that when the alternative is a second Great Depression.”

    I get the sense that SRW is caught on that ‘inherent unfairness’ whereas other commentators like Krugman, Drum & Yglesias are pointing to the larger picture.

  9. [...] – Yes, Virginia. The banks were bailed out. [...]

  10. Jacob writes:

    There’s a comment on your 2006 post about the prime rate that seems prophetic today:

    Goodness… I wonder what they have left. Direct payoffs? Market plunge protection, perhaps–given how dependent banks are now upon such questionable beasts as home builders, hedge funds, and securitized exotic and low-APR mortgages.Aaron Krowne

  11. gappy writes:

    I haven’t read the 29,000 pages of documents, and I suspect the authors of the now-famous BB piece have either. But I will say this:

    1. of the 4 forms of government assistance you list, only #2 qualifies as taking downsize risk by provide a cash flow stream similar to an insurance contract, the value of which is hard to estimate because of the complexity of the arrangement and of #2 below…

    2. Does anyone in their right mind believes that any counterparty in the world could pay $7.7Tn, about half of a country’s GDP? To stay in character with your colorful analogies, the US resembles very much Inflammable. If the banks really go down, the government can’t pay; and indeed in a few months the government wouldn’t exist any longer. You can call it too big to fail or whatever. A simple model of pricing insurance in this case is simply inadequate.

    So Virginia, it’s complicated. Banks were and were not bailed out. Possibly, the verb “to bail out” is just inadequate to describe the situation. I find the whole exercise, essentially aimed at establishing a sort of debt of gratitude to be paid after the fact, pointless.

  12. [...] but certainly not least, Interfluidity unleashes his righteous anger against the defenders of TARP Share this:TwitterFacebookLike this:LikeBe the first to like this [...]

  13. George writes:

    Steve-

    First of all, I love your writing. Interfluidity is the first thing I read whenever there’s a new post. However, I really disagree with your analysis here. First, treating the bailouts total cost to the government as the total downside risk of those bailouts is crazy. That’s not how anything anywhere is valued. If you don’t adjust for probability, you’re valuing it wrong. Second, solving a liquidity crisis (i.e. keeping the financing available for an asset alive in the short term) is NOT the same as writing a blank check to banks to make them whole. Liquidity is short-term; solvency is long term. Third, liquidity crises are driven by two things: solvency issues or market failures. Valuing the risk of the government bail out of the banks in ’08 in terms of the market makes NO SENSE. Markets were driven by panic; if you believe that the EMH was in effect anywhere between August of ’08 and the announcement of TARP, you’re smoking some stuff I need to get my hands on. The banks (a) paid back their obligations once they cleared the short term (b) required no further financing once they cleared the liquidity issue (c) the market calmed down and restored a more rational (but greatly reduced) value to bank liabilities and assets.

    To conclude, there were bailouts. The government stepped in to provide financing to those who could not find it in the private sector. But do not treat them as a blank check to the banking sector with downsides that had practically no limit.

    Please keep writing, can’t wait for future posts!

  14. scrilla_gorilla writes:

    To significance of the statement, “By these actions, the state assumed substantially all of the downside risk of the banking system,” is exemplified by Ireland. They also assumed all the downside risk of the banking system, but their banks still failed. The possibility of being in the same situation in Ireland is a significant “cost” even if it didn’t actually happen this time.

  15. [...] Source [...]

  16. [...] Steve Randy Waldman, “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.”  (Interfluidity) [...]

  17. [...] Yes, Virginia. The banks really were bailed out Steve Waldman. Please read and circulate to those who still don’t get it. I love the golf buddy analogy. [...]

  18. John writes:

    Re: 13 Second, solving a liquidity crisis (i.e. keeping the financing available for an asset alive in the short term) is NOT the same as writing a blank check to banks to make them whole. Liquidity is short-term; solvency is long term.

    I’ve never understood the “providing liquidity is not a bailout” line of argument.

    Look– the price of an asset should in theory reflect the risk associated with that asset. This not only includes things like default risk and currency risk, but also liquidity risk. The more risk– the lower the asset price.

    When the gov’t comes in and magically wipes away any of those risks, it is a windfall for the investors who assumed those risks. Writing a check to cover a default is not any different from suddenly providing liquidity to an illiquid asset. Put another way– if you let me know in advance that the gov’t is about to guarantee liquidity of a notoriously illiquid market (collectibles, anyone?), then I will be happy to make a ton of money off of that information.

    As for liquidity being a “short-term problem,” assets pricing never stops reflecting liquidity risk. The government bailout had the same effect as covering default risk, namely, keeping a whole bunch of people who misprice risk in business and preventing the creative destruction that is capitalism from taking its course.

  19. ggm writes:

    “The fact that the money was returned is one of the issues. While it doesn’t excuse everything else that might be wrong, that fact shouldn’t be obscured in seeking the truth.”

    When I last checked in October, over $1.5 trillion in government bank and mortgage support was outstanding. Who is obscuring what?

  20. [...] Yes, Virginia. The banks really were bailed out – interfluidity [...]

  21. beowulf writes:

    “After the meeting, I said to one Treasury staffer, “One of the quiet casualties of this crisis is that you lost your last bit of slack from the entitlement systems.”

    Right, fiat money when the banks need help, pay as you go balanced budgets when the elderly need help. I can’t imagine why actual voters might have a problem with that.

  22. [...] Virginia. The banks really were bailed out. (Interfluidity) Steve Randy Waldman notes that those who argue taxpayers lost nothing in the bailouts because the [...]

  23. The “inherent unfairness” is the bigger picture, unless you think that people behave the same way in systems they perceive as rule-governed and reasonably transparent, and systems run by predators who want to loot everything they have.

  24. #21 beowulf

    Ding!

    This may be a factoid, because I’m forgetting which of the many piles of money heaved at the banksters the arithemetic was done on, but:

    If you do the arithmetic, “the bailout” [for some definition of bailout] amounted to $40K per US adult citizen. Does anybody doubt that if we have given each citizen $40K, the country as a whole would have been better off, and we’d be out of the depression? Atrios has exactly the right frame on all of this: Just give people money.

    And why not? It’s not as if banksters were the only people on earth, though they might like to think so. Give me $40K and I’ll buy a new roof, a new boiler, and fix my teeth, giving employment to roofers, heating contractors, and a dentist and their office, and inducing manufactures in shingles, nails, liners, tools, furnaces, piping, insulation, etc. Give a bankster an extra $40K and it goes to luxury goods. And hookers and blow. Not that there’s anything wrong with that, but which policy leaves the country better off?

    NOTE ZOMG, “they might not spend it wisely.” First, so what? Second, a burst housing bubble and massive accounting control fraud is “spending it wisely”?

  25. Angry Panda writes:

    1. I don’t recall any of the banks giving back the $13bn in interest income earned on their “crisis” Fed loans and guarantees. See Bloomberg’s stories on the matter published this very week.

    2. Whether the money has been paid back now is immaterial to the core of the issue. At a certain point in time, the banking system became insolvent. The government (and the Fed) elected to expend a certain amount of direct funding, low interest rate loans, and guarantees – Bloomberg had estimated “total commitments” somewhere in the $10+ trillion range back in Q1 2009 (something like $6 trillion actually utilized).

    At the time, there was no way of knowing with absolute certainty when or if these funds would be “paid back”. [Good analysts and economists, few that there are, could probably have conjectured or created some plausible scenarios, but no-one _knew_.] At the time, the government decided to unilaterally assume the risk (to the tune of over half its annual GDP) in order to rescue the private banking sector, which would otherwise have been flushed down the tubes. That’s the bail-out, not the actual money – the pledge to absorb all private sector bank risks using the public budget and keep these institutions in business – _regardless_ of repayment prospects, which in any case were not perfectly knowable at the time.

    If someone does wish to argue about “funds being returned”, that argument is easily deflected by the concept of “opportunity cost”. The government can spend $1 trillion rescuing a private bank, or it can set up its own lending operation (using that same $1 trillion) to replace that bank’s function within the financial system; or it can even allow that bank to liquidate, make whole its depositors (but only its depositors) where appropriate, and use the rest of the $1 trillion for direct economic spending. Each approach has short-term and long-term “profit outcomes”. I would argue that propping up an over-levered private bank is probably one of the least economically efficient choices in this regard (although also the most preferable to the financial elite).

  26. mattski writes:

    lambert:

    There is a distinction to be made, and I think you’re missing it.

    Sure, there was unfairness in the manner in which banks were bailed out. That isn’t the heart of the scandal. The real problem is that after the financial tourniquet was safely in place the attention of policy makers should have turned to unemployment. But that didn’t happen.

  27. [...] interfluidity » Yes, Virginia. The banks really were bailed out. [...]

  28. Benign writes:

    You don’t mention the phony “pretend and extend” accounting standards that are protecting bank balance sheets inflated by loans fraudulently induced from hapless consumers by “I’ll be gone, you’ll be gone” grifters (cf. Michael Hudson’s work).

    Mark to market for long term assets requires changes that can be “deemed to be permanent,” and I think we’ve reached that point. The managements and investors in the banks would have taken a huge hit without “pretend and extend” and the secret emergency lending.

    You can’t squeeze blood from a stone. Until the big banks recognize their losses, the economy will stagnate under bad debt and phony accounting.

    Occupy has it right: let’s have an end to corruption in high places.

  29. SW:
    Agree. The banks were bailed out. Only bad accounting has obscured the economic substance of what happened. Got gold? Get more!

  30. john writes:

    I keep trying to get #OWS to chant “mark to market! mark to market!” If TBTF banks had to they’d all be shown insolvent and the bailouts made visible. And then there is this: http://timiacono.com/wp-content/uploads/11-05-27_fed_balance_sheet.png , where did all that money go the Fed paid for this? I sure as hell didn’t get any of it!

  31. [...] Steve Waldman explains why the idea that the bailout of the banks was not really a bailout is pure and simple BS. 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. [...]

  32. Becky Hargrove writes:

    Perhaps the biggest problem now (in that the bank bailouts happened) is that so many want to close the door to what even faintly looks like a ‘bailout’ of any other kind, be it monetary or fiscal. It’s as if the banks already got all the money that supposedly exists to fix anything, and a lot of people are willing to endure another Great Depression in that belief.

  33. Elder Lawyer writes:

    Good point about TARP not being a “free lunch,” but in the throes of the crisis, was it a reasonable response to underwrite the banks risk?

  34. Peter K. writes:

    The bank bailouts were/are “trickle-down socialism” but it didn’t trickle down very much. We got 9 percent unemploymen instead of 15 percent. They let the banking system collapse in the late 20s and 30s and it didn’t turn out well.

    The Fed in coordination with other central banks just gave another bailout to European banks. My guess is that it won’t be enough and thanks to Germany we’ll get to see what happens when there isn’t enough trickle-down socialism.

    But yeah given that the banks lobbied against Frank-Dodd we should have nationalized them or at least followed the Swedish model.

  35. Not all Bank Bailouts are Systemic Bailouts. But, in the case of this Bank Bailout, I really do think Systemic Bailout is more apt, irrespective of the flak I receive for holding such a contrary opinion. There were no dress rehearsals for systemic collapse, as the Japanese perform for tsunamis or earthquakes – and even then, unforeseen shit happens to what are the best laid of plans. All the critiques of the methods and programs and their ill-conception with regards to design, fairness, are likely valid. Yet, I find it near-impossible to quantitatively compare this to the potential or likely systemic downside that would have resulted from allowing,(or for Libertarians perhaps encouraging) the inertial liquidation and subsequent cascade impacting an entire chain of economic and financial and social dependencies – quite unnecessarily. This would have yielded a different set of outcomes, with different winners and losers, but would it have been fairer? Fairer on the who-knows-how-many-more unemployed? Fairer in the destruction of the capital stock? Fairer in laying waste to human capital? Was this just just some financial Munchausen Syndrome? This is open for debate, but I think not, and err on the side that actors, in the heat of the moment, were primarily acting in the public’s interest as a Systemic Bailout.

    We should shame and ostracize the incidental looters. We should prosecute the willfully-fraudulent. We have the power to tax inadvertent windfalls. We should attempt to price risk accurately, as well as actions with good and bad externalities impacting the Public’s interest. And we should – contrary to the last two decades of “The best public interest is no public interest”, make protecting the Public Interest the foundation of the political process. If calling it a Bank Bailout helps in these pursuits, then I can call it anything you want. But I think, for the sake historical analysis and future policy interventions, we should do our best to be as accurate as possible in all regards.

  36. [...] [...]

  37. liberal writes:

    wrote,

    We should shame and ostracize the incidental looters. We should prosecute the willfully-fraudulent. We have the power to tax inadvertent windfalls. We should attempt to price risk accurately, as well as actions with good and bad externalities impacting the Public’s interest.

    But all of that is much, much more difficult because the bailout was conducted without strings attached.

  38. liberal writes:

    nihoncassandra wrote,

    Yet, I find it near-impossible to quantitatively compare this to the potential or likely systemic downside that would have resulted from allowing,(or for Libertarians perhaps encouraging) the inertial liquidation and subsequent cascade impacting an entire chain of economic and financial and social dependencies – quite unnecessarily.

    That’s a false dichotomy. There were other choices. The system could have been bailed out with more strings attached, shareholders wiped out, bondholders haircutted, executives either criminally prosecuted or assigned civil liability, etc etc.

    [NB: quote in previous comment was also from nihoncassandra]

  39. liberal writes:

    JKH wrote,

    All of the “subsidies” you note are reflected on a gross basis as part of the net result in the repayment of the money, so that’s not really a separate issue.

    How is that true?

  40. liberal writes:

    Angry Panda wrote,

    If someone does wish to argue about “funds being returned”, that argument is easily deflected by the concept of “opportunity cost”.

    Exactly. That’s really the most important point here.

  41. liberal writes:

    mattski wrote,

    There is a distinction to be made, and I think you’re missing it.

    That’s not really true, because the viewpoints that the banksters ought to be bailed out, but the average citizen ought not to be, are both part of the same, single worldview.

  42. liberal writes:

    George wrote,

    First, treating the bailouts total cost to the government as the total downside risk of those bailouts is crazy. That’s not how anything anywhere is valued. If you don’t adjust for probability, you’re valuing it wrong.

    Where did he explicitly not adjust for probability? Looks like a strawman to me.

    Valuing the risk of the government bail out of the banks in ‘08 in terms of the market makes NO SENSE. Markets were driven by panic; if you believe that the EMH was in effect anywhere between August of ‘08 and the announcement of TARP, you’re smoking some stuff I need to get my hands on.

    Sure, some financial institutions were not insolvent. But you write your comment as if you’d never heard of the real estate bubble or of massive leverage.

  43. liberal,

    Oh I agree that in principle we coulda’/shoulda’ extracted more – be it wiping out bank equity holders, some haircuts on bank sub debt, regulatory evolution – our wish lists are probably not dramatically different. But it doesn’t alter my (perhaps optimistic on human nature) belief that in the heat of the moment (and it was HOT), it was about The System, not the parochial interests. That the then administration was ideologically predisposed to cronyism, and GS and ilk were A-1 Cronies, so were the opportunities and risk-asymmetries created. But even here, The People must accept their share of responsibility for their political choices, and being so cavalier with the concept of the Public Interest, for their weakness in the face of demagoguery. But I am not wavering in my belief that whatever the bailout be termed, whatever its odious byproducts, it was superior to the cascade and likely consequences of unfettered liquidation.

  44. Paine writes:

    Superb post
    You loathesome swell head you

  45. Anonymous writes:

    I’ll take moral hazards and conflicts of interest for $1000, Alex.

  46. beowulf writes:

    Let’s imagine that we had a hippie, socialist, public-minded Ralph Nader type as Secretary of the Treasury. Like you, I’m of course thinking of Reagan’s Tsy Sec, James A. Baker. I wonder what HE would have done in 2009…

    we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.
    To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000. But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.

    http://www.nakedcapitalism.com/2009/03/jim-baker-first-lets-kill-all-zombies.html

    As a rule of thumb, when the policies of a Democratic President are to the right of James effin’ Baker, his administration is doomed.

  47. Tom Hickey writes:

    The point that needs to be made is that the bailout was improper as Bill Black has pointed out, in that banks that were insolvent, namely the TBTF’s, would have been put into resolution if the law had been followed, they . Black also alleges that the problem was not imprudence but “control fraud,” which he defines as CEOs running their companies as fraudulent operations in order to enrich themselves and their cohorts.

  48. Nick Rowe writes:

    Why do banks have to exist? Is it because of the Samaritan’s dilemma? They know you’re going to have to bail them out if they exist. You can’t help it. So they exist.

  49. K writes:

    Funny, Nick! And profound. Banks exist to the extent that they know you’ll bail them out. So if you want them to exist a lot less, find a way to *credibly* commit to never bailing them out (revoke deposit insurance, give everyone a deposit account at the Fed, you know the story).

    Bang on post, Steve! The “they paid it back and anyways we had to it” crowd really burns me up. There are a million things we could have done before *this*.

  50. [...] by Ferdinand Bardamu I find it really depressing that I have to write this. But it seems I have to write it. [...]

  51. [...] interfluidity » Yes, Virginia. The banks really were bailed out.. Like this:LikeBe the first to like this post. [...]

  52. maynardGkeynes writes:

    Great article.

    @Kid Dynamite. It wasn’t much of a bailout for the MMs. Even reserve paid 97 cents. I was in Vanguard Prime. Given what they held, if they broke the buck, my guess is that I would have gotten back 99.5% or more. Probably 99.999999%. BTW, I was probably getting less interest than you as and FDIC bank. I was just too lazy, but I was not imprudent. There was virtually no risk at Vanguard and many other MM funds, even without the bailout.

  53. Bozba writes:

    Remember that if risk had been priced correctly, it would have been more expensive, markets would have been less dynamic, growth slower, bankers poorer, and consumers would have had to consume less LARD. Do you really want that? The world NEEDS fat ugly stupid and charmless consumers.

  54. [...] blogs about how yes, the bankers really were bailed out. Big time. Great points, here is my favorite [...]

  55. [...] interfluidity » Yes, Virginia. The banks really were bailed out.. Share this:TwitterFacebookLike this:LikeBe the first to like this post. This entry was posted in [...]

  56. [...] 2. SRW on the bailout. [...]

  57. Zap writes:

    ….and they took it all out of mine, yours, moms, dads and grandpa and grandmas pockets by way of ZIRP

  58. Frank in midtown writes:

    aaaaaaahhhhhhh noooo!!!! The profit from the emergency lending facility pretty much means the Fed lent too much and screams of moral hazard. I don’t think that enough pain was created to ensure learning.

  59. [...] York Fed Brownshirt Jason Barker Urges Police to Crack Skulls of #OWS (must-read) Yes, Virginia. The banks really were bailed out. The bad internet bill that could destroy us At Top Colleges, Anti-Wall St. Fervor Complicates [...]

  60. Nicolas writes:

    That is NOT at all what is going on. By pointing at the wrong place you cause a disservice to what you intend to prove

  61. Nicolas writes:

    It is amazing how you can be so clueless about principle institutions operate on and the old established principle that back them up. It is like illiteracy.

  62. Chris writes:

    Good piece Steve. Your analogy at the end – cut me a check and tell me no-one has lost.

    The usual way the govt cuts a check to bail someone out is to borrow a Trillion from the Fed – with some investors (countries, people banks whatever) chumping up some of the money by purchasing bonds.

    Would your answer have changed if the Treasury had simply credited the accounts of the banks it wanted to bail out.

    A Trillion in additional $US in the system – would only be a minor blip on the forex cross rates.

    New Economics 101 (2011 update) – countries that issue and back their own fiat money do not need to borrow to spend.

    The US Govt has been devaluing the $ and the assets it backs for years – forget the debt, its not important and is a fraction of the stock of US$s in the global economy.

    Hey USA, you don’t need to borrow to repay your existing creditors.

  63. fresno dan writes:

    A much needed antidote to the notion that TARP and all the other backstopping was “paid” back.
    I always appreciate Mr. Waldman’s very incisive and valuable insight into the fundamentals of what is happening.
    This is definitly a link I will keep for future reference and to refute those who would say the “FED worked as designed.”
    (maybe I would haved noted Bagehot’s rule of lending to SOLVENT institutions at PENALTY rates)

  64. [...] 1. Interfluidity on the bailout. [...]

  65. [...] Yes, Virginia. The banks really were bailed out. @1:51 pm Comment (0) [...]

  66. Jim writes:

    Steve: Bailout Schmailout. What do you care? That the Government didn’t make more of a profit on the financing (debt and equity) that it provided? Or that the investors (debt and equity) in these ridiculously levered, ludicrously huge institutions didn’t suffer losses when the managers to whom they entrusted their savings and capital screwed up? What’s your real gripe? Sure: they were bailed out. THIS JUST IN!

    But that’s how the system was set up: deposit insurance from the FDIC, lender of last resort liquidity from the Fed and, after the DOW dropped 1,000 points when Congress first rejected TARP, TARP capital from the Congress. Big institutions, with big footprints in the clearing and settlement systems for stocks, bonds, checks, Treasuries, debit cards, payroll processing, merchant payments, hell payments of all sorts, $11 trillion of debt obligations to money market funds, pension funds (private and public),insurance companies as well as the deposits of ordinary Americans and corporate “citizens” (so the Supreme court says),yeah, sure, Steve, we could have let those institutions fail and have foisted losses on those depositors, pension plans, insurance companies, money market fund holders, and corporations, let the payment and settlement systems for all transactions come to a friggin’ halt and after a couple of months of economic paralysis picked up the pieces, but it’s beyond peradventure that we’d be looking at a quite different (i.e., much worse) unemployment and GDP scenario than the difficult situation we are already in. Victory for the people! Bank shareholders and creditors take massive losses! Banks and Investment Banks collapse! Payment and settlement systems nationwide shut down! Economic activity grinds to a halt!

    Yes, it sucks that because the alternatives were so much worse we had to bail the bastards out. But to get on a soapbox and just bitch about the fact that because the direct cost to the taxpayers were minimal (while recognizing the indirect costs (in unemployment insurance, food stamps, aid to families with dependent children, medicare and medicaid) skyrocketed as a result) seems more than a little impish.

    The Government did what 80 years of bank regulation and statutory authority enabled and intended it to do in just such a crisis: bailout the banks out because they are key players in our payment and settlement systems, to our savings and investments, in short because they underwrite the “values” of the financial assets (and “money”) on which individuals, households, municipalities, corporations and other non bank financial institutions depend. That those values should be held hostage by a handful of HUGE institutions’ mismanagement and greed is the problem, not the fact that the Government did its job, more or less, well. Government bashing is fashionable, I recognize. But it doesn’t advance the ball, actually.

  67. Louis N. writes:

    Dental insurance for that tweaker boy, Steve.

    Secure the policy that indemnifies Lil’ Steven against cavities, plaque and crystal meth. Then he can melt more ice than the Bruins.

    Indemnity for poor hygiene, bad habits and boring behavior must be included in the policy. For a small premium and tiny deductible, the former are even covered by plans in Arkansas.

    But protection against self destructive behavior is impossible to mitigate and a risk that is assumed only by the insurer of last resort.

    So what are the costs for this Sovereign Fuckup Fund?

    Priceless to the insured when he stumbles into the desk at noon and flashes two rows of white fangs. (Assuming he works at an investment bank).

    Pocket change to Big Poppa Steve who paid the premium and deductible to unload that brat on a crank bender.

    The expense is borne by all.

    Smile.

  68. Greg writes:

    I hope someone here corrects me if Im wrong but I’m not sure its correct in any way to say the govt has been paid back. If the govt were paid back trillions by the banks how could the govt have been running any deficits in the last three years. The govt is not putting money in a piggy bank somewhere as it comes back from banks.

    As I understood the efforts that the govt took to stabilize the financial system it involved a number of things but the largest was the removal of bad assets from the balance sheets of banks to restore solvency. Unless those assets are taken back on to the balance sheet of the banks at current market prices, one cannot claim to have paid back anything. I believe the assets are still on the govts balance sheet

  69. [...] big banks, counters financial analyst Steve Randy Waldman, have definitely not paid back the lucrative freedom from [...]

  70. [...] big banks, counters financial analyst Steve Randy Waldman, have definitely not paid back the lucrative freedom from [...]

  71. bob writes:

    I’m a regular guy. Working-class, if you need a label. It seems to me that Steve’s point is that 1) the bailout happened (whatever you want to call it) 2) that the system was “set up” intentionally to allow repayment. 3) That there was repayment doesn’t alter the historical fact that there WAS a bailout.

    Where I’m from, we have a saying that seems relevant, “Don’t piss on my head and tell me it’s raining.”

  72. [...] interfluidity » Yes, Virginia. The banks really were bailed out. [...]

  73. oiu writes:

    Could someone please answer Greg #68 above.

  74. [...] must read from Steve Waldman at Interfluidity: “Yes Virginia. The banks really were bailed out.” If you’ve heard the argument that the bailouts are no longer consequential because the [...]

  75. [...] big banks, counters financial analyst Steve Randy Waldman, have definitely not paid back the lucrative freedom from [...]

  76. [...] must read from Steve Waldman at Interfluidity: “Yes Virginia. The banks really were bailed out.” If you’ve heard the argument that the bailouts are no longer consequential because the banks [...]

  77. I need your counterfactual: what would have happened to ordinary people had the bailout not happened as it happened?Also, your policy proposal: how should it have been handled (ex post)?

  78. [...] the claim that large banks didn’t get bailed out because they repaid their TARP loans. and other forms of aid. Cash is not king in financial [...]

  79. Fed Up writes:

    JKH, thanks!