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Bailed-Out Banks Making Profits -- For Taxpayers

[ Posted Monday, August 31st, 2009 – 16:06 PDT ]

Some of the Wall Street firms who got so-called "bailouts" from the taxpayers are making money again. But this is not a scandal, it's good news. Because the United States Treasury is raking in some of these profits, as a result of the money invested earlier under the Troubled Asset Relief Program (or "TARP"). This should not come as a stunning surprise, but it indeed may to some people -- because of the massive failure to politically frame the issue correctly when the money was originally invested. This failure, it should be noted, is shared by both the Bush and Obama administrations.

Here's a quick quiz: When I say "bailout," what springs to your mind? Shoveling taxpayer money at Wall Street for free? Or investing public funds to shore up our banking system, with the expectation that when times got better we'd turn a profit on these investments? While the program has been derided in the public's awareness as the former, the latter is closer to the actual reality. And the reason many Americans would choose the first answer is a failure of politics.

Because the taxpayers did not just "hand money out for free." Money wasn't just "given" to Wall Street firms. It bought something of value. And now that the firms (and the market in general) are recovering, they're starting to pay it back. With interest.

But the news is not all rosy. The jury's still out on a lot of the government money invested in the past year, and some of the firms propped up by this money could eventually fail -- meaning our investment would be worthless. So it's a little early to proclaim a wide-reaching victory for the whole idea.

Even so, the news that we're making a profit really shouldn't be as shocking as it may seem. Because that was the plan all along. The reason for the shock is that this message never really got out to the public. Even now, writing about it, I find myself wanting to type "money given to Wall Street" rather than "money invested in Wall Street," because that's the way everyone now talks about it.

But it was investment money. And investments, if things go well, are supposed to make profits. As they now are, at least in some cases. The New York Times has the full story, and if you click on the little "Graphic" button on the side of the article, you can see some hard numbers which show the profits the Treasury is now reeling in. From eight of the largest banks, we've already made four billion dollars profit -- a return calculated at around 15 percent (which is pretty healthy).

The only thing missing from the article, which would have allowed us to put the numbers into some sort of context, was any indication of how much has been paid back in total. In other words, "the bottom line" on the TARP money. We know that $700 billion was authorized for TARP, but we don't know how much of that has now been paid back. Meaning, as I said, it's hard to put the $4 billion into context.

And there is more than one flavor of "bailout." Money was pumped into: banks, investment firms, insurance firms, auto companies, and Freddie and Fannie. So what we're talking about here is a small part of the picture. Some banks' future is still uncertain, and there are still a lot of "toxic" mortgages out there on the books of some of these banks. The Freddie and Fannie bailout (which was a separate piece of legislation, but has tended to get lumped in with all the other "bailouts") may wind up costing us money in the long term. And the auto companies were never intended to be part of TARP in the first place, but were more of a political afterthought. We may still turn a profit from GM and Chrysler, but it may take a bit longer to see that profit (although who knows -- the last time the government bailed out Chrysler we made money when they paid back the loans before they were scheduled to). And, looming over the big picture is still the insurance giant A.I.G., whose future is still uncertain.

Four billion in profits, when held up against the unanswered questions, may not turn out to be all that impressive. But then again, it might be the beginning of the government turning a steady profit on the money loaned out to these various companies. This could make President Obama's job easier on the budget and deficit projections in the future. As the money was paid out, it counted as a government expense, which is a big part of the reason this year's annual budget deficit is going to be so whoppingly enormous. But when the money is paid back, it counts as income. And, especially if this money is paid back faster than expected, this is going to serve to lower deficits in the next few years. Making the whole budget process easier for the president and for Congress.

The banks have a huge incentive to pay this money back as fast as they can, too. In the first place, the longer they hold government money, the longer they have to keep paying quarterly dividends (of five percent) on it. Once it's paid back, these dividends will end. But the real goad to paying the money back is the fact that when the government takes a large ownership stake in a company (like any large investor), it gets a say in how the company is run. Which includes lots of faux outrage over executive compensation (I say "faux" because for all the chest-beating in Washington over the issue, no real caps on this compensation have been set). But it's not exactly the type of press the companies want. So it's a big motivating factor: pay back the money, and the government can't meddle in the companies' affairs any more.

But none of this was ever adequately explained -- by either George W. Bush or Barack Obama. They both could have always spoken of "investment" instead of "bailout," but they didn't. Or if they did, it was drowned out in a media chorus from detractors of the plan. So both Bush and Obama bear a lot of the blame for the failure to adequately explain that this money was being invested in these companies, and that when things got better, we'd get profits from this investment. And, to be fair, when these profits do come to light, both Bush and Obama equally share the credit as well. Both presidents either began or continued some very unpopular programs. They both got Congress to begrudgingly go along with the plan. And they both faced a lot of political heat for doing so. And even though the profits are going to show up on Obama's watch, it would be unfair to say that he deserves all the credit for them. But he's certainly going to be the one to reap the benefits, as in future years he may astonish economists with much better deficit projections than would have been thought possible.

The larger point, though, is that none of this should be as astonishing as it may now seem. If TARP was sold as an investment program from the start, people would think about it in the same terms as they think about their 401Ks -- you invest some money, you take some risk, and you hope for good times and profits down the road a little bit. If that is how the issue had been framed from the beginning, instead of as a "government handout," or a "taxpayer-funded bailout," or "shoveling cash to Wall Street," then we'd all be less surprised by today's news.

 

Cross-posted at The Huffington Post

 

-- Chris Weigant

 

15 Comments on “Bailed-Out Banks Making Profits -- For Taxpayers”

  1. [1] 
    Elizabeth Miller wrote:

    I guess all of the fascinating - and, I mean that sincerely! - testimony given by Secretary Geithner before the various congressional committees, including the compelling Q&A sessions - once again, I'm not being facetious, here! - ought to be required viewing.

    :-)

  2. [2] 
    Elizabeth Miller wrote:

    There's something else that makes it difficult to put the TARP numbers in context and which the NYTimes article failed to mention...surprise, surprise.

    The monies that flow back into the TARP fund as banks make repayments with interest, may be re-distributed to wherever they may be needed to shore up one financial entity or another. This is a good thing since it may prevent having to ask Congress for more TARP funds.

  3. [3] 
    Michale wrote:

    I'll credit the TARP when I can cash a check specifically from the bailout..

    Until then, it's simply the government taking my money (AGAIN) to use for something that I don't agree with..

    Unless, of course, it's used to fund the troops.. :D

    Michale.....

  4. [4] 
    Elizabeth Miller wrote:

    Michale,

    So, why don't you agree with the TARP? Seriously.

  5. [5] 
    Osborne Ink wrote:
  6. [6] 
    Michale wrote:

    So, why don't you agree with the TARP? Seriously.

    Because it injected the government into something the government has no business being in.

    Ya'all complained about how the Bush Administration was taking over every facet of our lives with the counter terrorism policies and such. That was nothing but hysterical hyperbole.

    The Obama Administration *IS* trying to take over aspects of our lives, in areas that have always been the purview of the private sector.

    I think we all can agree that less government is better government.

    Yet, how can that be reconciled with the support ya'all have for the Administration's policies?

    Wall Street, Banks, Auto Companies and now Health Care.

    If Bush had tried getting control of all those normally private sector endeavors, the Left would have gone ballistic.

    It's been proven beyond any doubt that bailing out businesses that are dying simply doesn't work and wastes money.

    Obama bailed out the banks. Thousands of banks have still failed.

    Obama bailed out the auto industry. Chrysler and GM still went bankrupt. The only auto maker that DIDN'T go bankrupt is the auto maker that DIDN'T take any bailout funds.

    So, what can a logical and rational person conclude from these facts.

    That bailouts are simply a waste of money. The object of the bailout still fails and the taxpayers are billions and billions of dollars poorer.

    "Let them die."
    -Captain James T. Kirk, STAR TREK VI, The Undiscovered Country

    Of course, Kirk was talking about Klingons and we're talking about dying businesses but the point is that, with businesses that are dying, the more logical approach is to let them die and then rebuild a new and better business. The very first rule when you are in a money hole is to STOP DIGGING.

    Apparently the Obama Administration does not understand that one very simple and very basic concept.

    Michale.....

  7. [7] 
    Michale wrote:

    Ya know what the biggest problem with conservatives is?

    To quote Jeff Foxworthy (re Rednecks):

    "We just can't keep the most ignorant and moronic amongst us off the TV."

    http://s.wsj.net/public/resources/images/NA-BA144_OVERLO_G_20090831184054.jpg

    Not that I am saying that the woman is ignorant or a moron. But jeeze louise, she sure looks the part. :D

    Michale.....

  8. [8] 
    Elizabeth Miller wrote:

    Michale,

    Your arguments are anything but logical and, in fact, extremely disjointed...it pains me to say.

    And, you must know that your comparisons between the Bush administration and the Obama administration are extremely hard to fathom for any logically thinking individual, based on the competence factor alone.

  9. [9] 
    Michale wrote:

    Your arguments are anything but logical and, in fact, extremely disjointed…it pains me to say.

    For example.....?????

    The only disjointed-ness I can see is where I forgot to close my BOLD attribute.. (CW, would you be so kind?? :D)

    And, you must know that your comparisons between the Bush administration and the Obama administration are extremely hard to fathom for any logically thinking individual, based on the competence factor alone.

    Oh, come on. That's simply partisanship talking.
    To claim competence or incompetence solely based on which political party is in power is ludicrous.

    I can point to many aspects whereas the Bush administration was VERY competent. Just as I can point to many aspects where the Obama administration is utterly INCOMPETENT.

    Blanket assessments of competency solely based on political party is actually surprising coming from you, Liz... :D I had always considered you more even-handed in most areas, our torture discussion notwithstanding. :D

    Michale.....

  10. [10] 
    Chris Weigant wrote:

    Michale -

    Um, I think I fixed the one you were talking about. You're welcome.

    -CW

  11. [11] 
    Michale wrote:

    Um, I think I fixed the one you were talking about. You're welcome.

    Danke...

    Yer my hero... :D

    Michale.....

  12. [12] 
    nypoet22 wrote:

    liz and michale: i think it would be fair to say that the bush administration proved themselves utterly incompetent, while the obama administration has yet to prove much of anything.

  13. [13] 
    Elizabeth Miller wrote:

    Michale,

    Blanket assessments of competency solely based on political party SHOULD be surprising, coming from me...should they have actually come from me.
    ..which they have not.

    I have to tell you, Michale...the way you have been steering the conversation around here lately - with EVERYTHING being attributed to partisanship, without exception - I've been downright nostalgic for our torture debates! And, I mean that most sincerely.

  14. [14] 
    Michale wrote:

    nypoet22,


    liz and michale: i think it would be fair to say that the bush administration proved themselves utterly incompetent, while the obama administration has yet to prove much of anything.

    I disagree.

    8 years without a terrorist attack on US proper in spite of overwhelming desire by terrorists to do so, is evidence of great competency by the Bush Administration. Many thousands of people are alive today that would not have been, if Bush et al were truly the incompetents that many on here would like people to think.

    On the flip side, Obama's inability to harness and control the HealthCare debate, despite overwhelming majorities in ALL aspects of government shows an level of incompetence by the Obama administration that is very surprising.

    Not to mention Obama's total blunders in handling of the CIA/Torture issue.

    The Bush administration got things done. In hindsight, some of the things done were not the best things to do, but you cannot argue that the Bush administration flailed around in a morass sea of indecision and incompetence.

    Liz,

    Blanket assessments of competency solely based on political party SHOULD be surprising, coming from me…should they have actually come from me.
    ..which they have not.

    Then maybe I misunderstood you would you said;

    "And, you must know that your comparisons between the Bush administration and the Obama administration are extremely hard to fathom for any logically thinking individual, based on the competence factor alone."

    I took this to mean you are saying that, based on competency, one can't even compare the competency of the Bush Admin with the competency of the Obama Admin.

    That, on the surface, appears to be completely partisan assessments of the two administrations. For I have shown, beyond any doubt, in at least ONE area, Bush's competency far FAR surpasses Obama's. Further, as CW does in his commentary, if you do agree with and support the TARP program (I don't, but you apparently do) then you must concede that it was BUSH, not Obama, who started the program and you must give credit to Bush moreso than Obama. Anything less is the afore mentioned partisanship.

    I have to tell you, Michale…the way you have been steering the conversation around here lately - with EVERYTHING being attributed to partisanship, without exception - I've been downright nostalgic for our torture debates! And, I mean that most sincerely.

    hehehehehe :D

    Fair enough..

    Could you give me an example of anything coming from the commenters (excluding CW) that is NOT based on partisanship?

    One only has to look at NYpoet22's post before yours to see partisanship.

    Ink's claim that everything is hunky dorky in Liberal Land defies all evidence that the Obama Administration is punch drunk and on the ropes..

    So Obama and Democrats will return from vacation wounded, divided and uncertain of the best way to turn things around.

    http://www.politico.com/news/stories/0909/26672_Page2.html#ixzz0PwUnt3S7

    THAT is the reality.

    "Everything BUSH did was bad and everything Obama does is good" seems to be the prevailing attitude amongst most commenters here. That is partisan in it's base, illogical in the extreme and 100% factually incorrect.

    As for me steering the conversation, what can I say. I am prolific. If anyone wants to wrest the steering wheel from me, feel free. :D I'de be happy to let someone else drive for a while. :D

    It's entirely possible that I have misconstrued comments to be partisan based when they were, in fact, not.

    If I have done so, I sincerely and humbly apologize.

    OK, OK..

    I SINCERELY apologize.

    I don't do 'humble' well. :D

    Seriously though, if I have misconstrued any comments and labeled them as partisan when they were not, please correct me.

    Michale.....

  15. [15] 
    Elizabeth Miller wrote:

    Michale,

    You should know that I have no problem with your steering the conversation...anywhere you want, in fact. I like you behind the wheel just fine. :)

    What I said, though, is that I am getting tired of your constant and unending attribution to everything that is said by everyone as nothing but partisanship.

    Can we not have a conversation anymore without it coming down to a comparison between how the Bush and Obama administrations have acted or would act? Can we say one word without it being deemed 'partisan'?.

    It's not too hard to misconstrue what people are saying when EVERYTHING they say is put through your prism of partisanship.

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