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The Ghosts of Bailouts Past, Bailouts Present and Bailouts Yet to Come

The US Treasury Department has just declared the bailout is over -- and that it was profitable too! But nothing could be further from the truth. Both claims are false.
01/05/2015 11:43am ET | Updated March 7, 2015
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The US Treasury Department has just declared the bailout is over -- and that it was profitable too! But nothing could be further from the truth. Both claims are false.

Technically, what recently happened is that the Treasury sold its last shares in a financial affiliate of General Motors and had earlier unwound the last of its direct investments in the financial industry made under TARP. So presumably we should all be happy and encourage the Treasury to become a consistent player in the stock market; maybe its Warren Buffet-like trading savvy will eventually lower our taxes. Thinking about the bailout this way is both factually wrong, and suggests a frighteningly flawed metric for determining when, if ever, the U.S. government should be throwing public money at failing private firms.

First, even if we accepted the Treasury's accounting and treated it like just another private trader, its returns are abysmal. The $15 billion profit the Treasury says it turned on its (claimed) $426 billion investments in Detroit and Wall Street represent less than a 4 percent total (not annual) returns. That is a bit better than most of us are getting in our pitiful savings accounts, but not much. Had there been a mythical private entity out there in a position to prop up the banks and GM in 2008 on the scale the Treasury did -- do you really think they would have done it at that price and without gaining complete control of these companies? The Treasury is apparently an abysmal equities trader, which is actually fine, because that is not its job.

Second, it is actually an even worse trader than its lousy proclaimed returns suggest because it can't properly count how much aid it gave -- and continues to give -- these businesses. Beyond the $426 billion of actual capital acquisitions the Treasury made, it provided guarantees and other support to these industries that experts have valued at more like $9 trillion. Calculate the $15 billion profit the Treasury is now bragging about using a $9 trillion base as the money that was put at risk and you start calculating minuscule returns like the 0.1 percent you'd see in a Chase money market.

The fact that the Treasury did not have to make good on its promises to cover trillions of dollars of potential losses the financial industry had recklessly exposed itself to doesn't mean the government did not give something of huge value. The mere fact of the government stepping in as a guarantor of things like toxic mortgage-backed securities kept the bank shareholders from being wiped out. This happened a lot as part of the bailout. But on Wall Street you can be sure to get paid for taking risks, regardless of whether the bad stuff you are insuring against happens. The Treasury, on the other hand, got paid basically nothing by putting all that taxpayer money on the line.

But making money was never the point of the bailout. The economy was in free fall. Even many of us in Occupy believe that the government needed to do something. But it could and should have supported Main Street, not the firms that caused the crisis. Congress created TARP and other programs ostensibly to support homeowners. Instead, the Treasury diverted the money to "foam the runway" for the banks so their crash wouldn't be too traumatic. Sheila Bair, the former FDIC Chair, argued that the FDIC should have put Citibank into receivership. Citi instead ended-up being the largest bailout recipient, while ceding no control to their public savior. As a result, the megabanks are back to profitability, banks now exercise more control over us than ever (when it should could have been the other way around) and many who lost their homes or jobs during the crisis have never recovered.

The Treasury got into this game to help average Americans, so if it thinks its job is done because it grossed a paltry gain on its massive interventions, it does not even understand its role. Hello! The crisis is ongoing: millions of homes still carry mortgages that exceed their value, towns across the country are in financial ruin because of the destruction of their real estate base and massive unemployment and 95 percent of the claimed "economic recovery" is benefiting the top 1 percent, who obviously did not need the help in the first place. And not only the crisis, but the bailout too continues: the Fed is still taking extraordinary measures including 0 percent interest rates, and the stock market is awash in printed-from-nothing quantitative easing money.

Most importantly -- forget what the law actually says about the permissibility of more bailouts -- given that the banks are bigger than they were before the crisis, does anyone really believe they are going to be allowed to fail if this all happens again? In fact, the next bailout is already being planned. Using language that Citibank lobbyists literally wrote, Congress just pushed through provisions to keep derivatives inside of FDIC-insured banks. Why does that matter? Because it means the government is officially on-the-hook in case the banks blow up (again). And, in the meantime, the public insurance the FDIC provides makes it cheaper for Citi and other megabanks to create the derivatives, because we are serving as their guarantor.

In short, it would be a hell of a lot more comforting if the Treasury quietly noted that it had divested from its 2008 capital acquisitions, and then boldly admitted that it was a national shame that it ever got involved in the first place. It would also be nice if the government were taking steps to reduce the need for future bailouts; instead of setting up the next ones. If they really want to give us some holiday cheer, they would break up the banks or take other effective actions to drive away our nightmares of ghosts of bailouts yet to come.