Policy

TARP Profit: The Lies Get Bigger and Bigger

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Rich Uncle Pennybags can't believe he made a profit on his TARP investment

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.