TARP Profit: The Lies Get Bigger and Bigger

Cherry-picked news doesn't come much cherrier than the tale of the TARP profits. If you believe The New York Times, the eight strongest banks covered in the Troubled Asset Relief Program (that's the $700 billion bailout approved last October) have paid back taxpayer money with interest. To stretch the slight return on investment from a very tiny part of the program into "profit," Timesman Zachery Kouwe engages in some mighty opaque language:

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

"By no means a full accounting" is putting it mildly. In Matt Taibbi's description, this figure is "sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up." Profit is what you make on top of your initial investment, so if you're talking about $4 billion on a $700 billion outlay, that's a little more than 0.5% -- more than Wells Fargo pays its depositors in interest, but nothing to write home about. In the event, the $700 billion is nowhere near to being recouped, and big chunks of it are tied up in losers like Bank of America, Wells Fargo, Citibank, and others.

The really disturbing thing is not that the case for TARP profits is so forced and hard to believe, but that it's being made at all. FDIC Chairwoman Sheila Bair believes 500 banks are in danger of failing; other estimates have put the figure closer to 1,000, and the list of problem banks keeps growing. If the government were even pretending the TARP was designed to shore up the banking system there would be no talk of profit because every penny the big banks paid back would be going back out to reward some other collection of incompetent losers.

If the Treasury really wanted to make the case for TARP it would make clear that none of that money should ever come back, because it was all a handful of dust in a vast sinkhole that has swallowed about $15 trillion in national net worth since the return to economic reality began in 2007. (That vast figure also helps explain why the Treasury and the Fed haven't been able to inflate salaries, consumer prices, producer prices, or anything else except the number of dollars in currency markets.)

Other reactions to the TARP profit story include Taibbi's:

Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven't retired their obligations yet, it's crazy to make any conclusions about TARP, pure sophistry. Moreover, a think tank set up to analyze TARP, Ethisphere, calculated in June that TARP was still $148 billion down overall, a debt of over $1200 per American. To start talking about what a success TARP is now is beyond meaningless.

The other reason for that is that it's only a tiny sliver of the whole bailout picture. The real burden carried by the government and the Fed comes from the various anonymous bailout facilities - the TALF, the PPIP, the Maiden Lanes, and so on. The losses from the Fed's purchase of distressed/crap Bear Stearns assets (Maiden Lane I) and AIG assets (MaidenLanes II and III) alone were as recently as late July calculated in the $8.6 billion range, and even that number is very conservative. Then there's the trillion or so dollars that the Fed used on buying up mortgage-backed securities and Treasuries; we don't know what their market value is now. And there are untold trillions more the Fed has loaned out in the last 18 months and which we are not likely to find out much about, unless the recent court ruling green-lighting Bloomberg's FOIA request for those records actually goes through.

Rolfe Winkler at Reuters:

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money...

The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once...

But the bailout was much larger than TARP. There is FDIC's debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve's emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don't know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.

All of these and more make up the implicit too-big-to-fail guarantee that the biggest financials have all received. The total cost won't be known for years, and the price tag is likely to be enormous.

Former Treasury Secretary Hank Paulson, in a typical meltdown of grammar and sense quoted by the Times' DealBook blog (and dig the supremely loaded language in the first paragraph):

Of course, the government's chief priority was to stabilize the teetering financial system, not necessarily to maximize profit. Now, the worst of the crisis is past, and the rewards from avoiding a widespread financial meltdown are incalculable.

"You do not stop a financial panic by putting capital and offering capital at the banks on the terms - the only terms that is available in the middle of a crisis," former Treasury Secretary Henry M. Paulson Jr. said at a Congressional hearing in July.

The Atlantic Business Channel:

I'm with Yglesias. TARP might not have been perfect, but it provided clutch funds for teetering banks during the darkest hours of the recession, and its early returns are positive. Not bad for a ongoing government working through the most complicated financial crisis we've ever seen.

And back with the grownups, Barry Ritholtz:

My definition of an investment profit is simple: You take the money you have invested, and if adds up to more that what you began with,  well, then, you have a profit.

Let's say on the other hand, you own 20+30 positions; 5 of them are higher than where you purchased them, and all the rest deeply in the red. Net net, your portfolio is down immensely. Most rational investors would hardly call that investment a "profit."

Looking just at early TARP repayments  means that we are ignoring a) the rest of the TARP; and b) the majority of other expenses, guarantees, loans capital injections, and outright spending that has taken place...

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages."

What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet's history.

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  • Shannon Love||

    We should also point out that several of the larger banks that took TARP money did not actually need. They accepted the money because the government did not wish to single out the failing banks. Undoubtably, much of the money that has come back so far came for banks that were never in much of bind anyway.

    It is also interesting to see the New York times praising a Bush administration initiative. I can only assume this is a sign of the apocalypse.

  • ||

    I'm with Yglesias.

    There's a pretty good clue that you're wrong. In other words, you are a fucking idiot if you could even type that phrase without a billion-word disclaimer following.

  • hmm||

    I'm surprised. Really. I'm also happy that I all my statements about the failures of TARP are coming true. I've been walking around feeding crow to people for months, and I look forward to holiday crow in coming months. Yes, I am the "I told you so" asshole.

  • anarch||

    And back with the grownups



    You've missed the point. It's For The Children!

  • alan||

    I'm surprised. Really. I'm also happy that I all my statements about the failures of TARP are coming true. I've been walking around feeding crow to people for months, and I look forward to holiday crow in coming months. Yes, I am the "I told you so" asshole.

    I will gladly carry that feed bag as you do just that. The mendacity associated with TARP is beyond anything I have seen in my life time, and I was astounded by the five year build-up up to the Iraq war.

    Saved the economy? Phashaw.

    Liquidating the fuck out of the bloated corpse of Wall Street, even if the outcome was for the majority of the assets go to firms overseas, if that is what it took to get it out of the hands of InGreenspanExpansionsWeTrust, it still would have been the most stabilizing event for the American economy in the last hundred years.

    Being familiar with BB&T and that institution being fairly representative of a typical flyby country financial institution post S&L Crises, I don't think it would have been even as drastic as the scenario I painted above. We would have had more sound firms eating the lunch of the overrated ones.

  • ||

    Moreover, a think tank set up to analyze TARP, Ethisphere, calculated in June that TARP was still $148 billion down overall, a debt of over $1200 per American.

    Hang on, I'll get my checkbook.

    Who should I make it out to?

  • alan||

    Hang on, I'll get my checkbook.

    Who should I make it out to?


    The children. For once it would even be an accurate allocation.

  • ||

    well, Schumer and Frank were on board too...

    "It is also interesting to see the New York times praising a Bush administration initiative. I can only assume this is a sign of the apocalypse."

  • ||

    I'm familiar with BBT as well...and I don't think they can count as "fly-by" anymore. Although their management can tell those First Union/Wachovia a*holes to suck it.

    BBT has managed well thus far, but there's some pain coming in commercial / construction.

    "Being familiar with BB&T and that institution being fairly representative of a typical flyby country financial institution post S&L Crises"

  • Rapture Forums||

    Does anyone here get nervous about the bailouts they are doing to other industries? First it was banking, then the autos, etc. When is it going to end?

  • ||

    in what will likely be the greatest transfer of wealth in the planet's history.

    I always wondered why Wall Street voted Democrat....

    I don't anymore.

  • alan||

    I'm familiar with BBT as well...and I don't think they can count as "fly-by" anymore. Although their management can tell those First Union/Wachovia a*holes to suck it.

    My former best friend's wife was fast tracked to a VP position at Wachovia about a decade ago. I have wondered how they came out of the shake up, but there is too much bad blood between us to inquire.

  • alan||

    oh, and I left out the intent of my remark: No offense on my part for the 'Wachovia a*holes to suck it'. She was okay for the most part, but I met some of her colleagues, general impression of them, weird, cold and cliquish.

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  • DJF||

    What is being ignored is how much the various bailout schemes have laundered money to the big banks which now claim they did not need bailout money. The money to AIG is a good example of where AIG was simply a conduit to send money to banks like Goldman who then claim that they paid back their bailout and are now profitable. The same with the money sent to Fannie and Freddy, that money has not disappeared it has gone off to others who will now claim that they were smart financially even though they had invested in enterprises which had failed.

  • From: The Nice Blog to michael||

    How sweet!

  • ||

    "oh, and I left out the intent of my remark: No offense on my part for the 'Wachovia a*holes to suck it'."

    That was a crude attempt at biting humor...obviously the rank & file at Wachovia had very little to control when management was buying Golden West. Although, based on their history, anyone in senior management at First Union must be checking their brain for cobwebs; FTU routinely screwed up acquisitions 8-12 years ago.

  • ||

    I don't think this is being ignored, just wouldn't expect too many "expert opinions" on CNBC anytime soon. Taibbi wrote a scathing column on Goldman few weeks ago, of course.

    There will not be a true accounting of this whole TARP scheme for another 5-10 years, my humblest opinion, because only then will all the resultant failures be truly known & any successes can be celebrated. It took over 10 years to close the cycle on the S&L debacle, start to finish.

    Considering the source of the capital is the government, any accounting of TARP will possibly be an improvement over what we taxpayers usually get. Pentagon/defense spending...Halliburton/KBR, for a few examples

    "What is being ignored is how much the various bailout schemes have laundered money to the big banks which now claim they did not need bailout money."

  • Russ 2000||

    that's a little more than 0.5%

    Isn't that what the Fed is paying to banks on their reserve balances? If so, this story could have been written the day the Fed said they would start paying interest on reserves.

    And I love "calculations compiled FOR the New York Times". The NYT's financial reporter is obviously not capable of doing financial calculations and so is not capable of verifying the calculations provide to them. So they could be complete bullshit but the NYT won't question it. And they wonder why the newspaper industry is dying. Language like that goes in one ear and out the other on TV and radio, in print it's damned obvious proof of incompetence.

  • Russ 2000||

    I'm with Yglesias.

    Pretty much the reason I let my Atlantic subscription lapse. Dropping good features and retaining that horrible-writer-and-shit-for-brains is a rip-off, even at the 95 cents an issue I was paying.

  • noone of consequence||

    Apparently, you just don't understand today's "journalism". It's no longer into investigation, fact-finding, or impartiality - it's just a cheerleader for a corrupt administration it helped bring about.

  • Cowboy||

    Interesting to see an attempt to calculate a return using the alleged $700billion TARP number, given that $200billion of that was never used, and is instead getting used as a Democratic slush fund...

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    Apparently, you just don't understand today's "journalism". It's no longer into investigation, fact-finding, or impartiality - it's just a cheerleader for a corrupt administration it helped bring about.

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