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Sep. 1 2009 - 9:42 am | 549 views | 7 recommendations | 42 comments

Bailout Propaganda Begins

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

via As Biggest Banks Repay Bailout Money, the U.S. Sees a Profit – NYTimes.com.

It was inevitable that the same people who pushed through the multi-trillion-dollar bailout of Wall Street would come out later on and tell us what a great idea theirs turned out to be, in retrospect and under the light of evidentiary examination. And we’re getting that now, with a pair of reports, the above one in the New York Times and another in the Financial Times, telling us the bailout is working because the government has made some money on TARP. They came to this conclusion by quoting Fed officials, who apparently calculated how much interest the Fed earned on TARP investments above what it would have earned on T-bills. The amount so far, according to these worthy gentlemen: $14 billion.

This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up. Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red. 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.

In light of all this, the Fed’s decision to brag publicly about a few loans that are actually performing is sort of scary — it speaks to a level of intellectual desperation and magical-thinking unusual even for a banker in the subprime/MBS era. Don’t be surprised if you hear more of this sort of thing in the coming years.


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  1. collapse expand

    And don’t forget the other obvious metric for success: are lenders lending again? I work in the commercial real estate world and I can tell you the answer to that question is a resounding NO. They are hoarding their cash and creating bonus pools, with no signs of lending on the horizon.

  2. collapse expand

    The above comment is spot on. I work at a bank which according to the board is “very well capitalized.” They feed us this bullshit about how we are in “great financial shape” then fire people, cut pay and sell off FNMA loans. Its underhanded and sideways. Banks are not lending, they are not thriving. The bottom line is wall street needs people to buy shit. They aren’t going to unless somehow some hack finds a way to juke the numbers.

  3. collapse expand

    Glad you are back Matt, you are the reason I started reading this blog. I check it everyday hoping you will provide me with a little truth.

  4. collapse expand

    If you apply their logic to the medical field, a terminal patient being kept alive by machines can be categorized as “successfully cured”!

  5. collapse expand


    I think also you have to separate the Fed from the Treasury. The Fed is still quasi private. The treasury actually originated the TARP loans after getting it funded from congress.

    The Govt is on some sort of hybrid accounting system of Cash and Accrual accounting. A cash accounting system usually doesn’t go much past a lemonade stand or say a drug dealer if they don’t “front” any drugs.

    Accrual Systems are for pretty much all other organizations except apparently govt. That’s where organizations have depreciating assets, goodwill, accounts receivables, accounts payables, short and long term loans, investments and so on.

    That means, in essence, that a sale is recorded when it is shipped or sold from a distributors warehouse not when it’s paid. A liability is recorded when it’s incurred , not when it’s paid except to take the liability off the balance sheet and reduce cash on hand by a like amount in it’s simplest form.

    The Govt runs on some crazed Hybrid that I think drove that head accountant of the GAO , David Walker, nuts to the point where he resigned. If the Govt ran on a accrual system, they would currently show 37 trillion in liabilities. That’s not politically possible. The fact that we are on the hook for those liabilities is immaterial when it comes to trying to make a pile of cow shit look like a small turd from a rodent.

    That’s why they bragged about the 14 billion that they will book . The losses? Yeah , well see no one has booked anything except the Fed and they ain’t telling unless this judge can start forcing some information from their clenched jaws.

    This is the same govt that borrows from social security, and uses the surplus to reduce the actual deficit even though it increases the over-all debt. What else did you expect?

  6. collapse expand

    These are all symptoms of an issue that is being compounded exponentially, daily. Until we change the American (albeit world) way from the pursuit of greed, to the pursuit of happiness and well being, our lives and offspring shall continue to exude pain and suffering. All people deserve happiness, not just the un-just.

  7. collapse expand

    [[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.]]

    “Their market value”? BWAHAHAHAHAHAHAHAHAHA ….

    Oh, geez … [wipes tears from eyes]

    Oh, that was funny. Thanks, Matt. I needed that.

  8. collapse expand

    Oh. My. God.

    Why, one may ask, are the media falling for this line? Note to self: Check this blog every time I run across anything remotely encouraging about TARP or related ripoffs in the superficial (or are they willfully blind?) mainstream media.

  9. collapse expand

    “But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.” – NYTimes
    Why is it seen as a windfall to the government when they sell back warrants that are worth increasingly more to the government as time moves on? This is like sitting at a blackjack table with ever-splitting tens and deciding to let the casino buy them back from you at a reduced price… When the government gambles with my money i expect them to think like a gambler: they shouldn’t be happy that they made $14 billion, but pissed that they didn’t make $60 billion…

  10. collapse expand

    I don’t believe the scandal is that the government will lose hundreds of billions or even trillions of dollars (I’m not convinced they will incur huge losses, even at AIG, see below). The big scandal is that the banks are getting access to capital for free, and in exchange they are just ratcheting up fees and maximizing profits while not contributing to an economic recovery. They will use their completely subsidized profits to justify a return to their obscene bonus system, even though most of those bonus recipients should be fired, and the equity of these firms greatly diluted.

    I believe a dramatic rescue was necessary, but it was implemented in the form of gifts to people who did not deserve it. The execs of these bailed-out firms now fancy themselves as financial geniuses for restoring profitability, but there was very little genius involved in turning the companies around, all it required was a pulse and no morals.

    I won’t be surprised if AIG doesn’t cost the government a cent, remember that they weren’t failing when they got bailed out, they only had to pay those billions of dollars to a handful of their CDS customers because their collateral had lost too much value. The debt that AIG was insuring wasn’t in default, but people lost confidence in a lot of the debtors, so the value of the loans dropped so much that given the mark-to-market requirement, the value of AIG’s assets declined dramatically. If they weren’t forced to mark their assets to an arbitrarily low value, they wouldn’t have been in technical default, and they wouldn’t have had to pay off GS and others, which the government stepped in to do. In exchange for paying off AIG’s CDS customers, the government received the loans that were being insured – and they may end up never failing, plus 80% of AIG stock. Given that the economy may have hit the ground at the bottom of the cliff it fell off (and is now bouncing up), it’s possible that many of those loans that AIG guaranteed and the government now owns will actually be paid off. If that happens, the big losers will be AIG’s shareholders, as the government now owns 80% of it.

    I think a good analogy of the government bailout might be using a flood to put out a fire. Yeah, we needed to put the fire out before it spread to its neighbors, but everything else around it has been flooded and everybody around the building that was burning now has to pay for their damages. I don’t think anybody should be surprised by politicians taking credit for this fiasco, it’s part of their DNA to make stuff up when the truth doesn’t look good.

  11. collapse expand

    Apparently the same algorithm’s that calculated CDS’s and other derivative related products are being used to assess the TARP returns.

  12. collapse expand

    Everyone’s goddess of finance, Meredith Whitney, has recently stated that credit lines are down by 57%. Plus, AIG has been paying back the US gov’t in SECURITIZED NOTES, which are only as valuable as the future equity of AIG (rather highly questionable at this juncture point).

    Then there’s that recent OCC report, putting several hundred trillion of notional derivatives on hand at JPMorgan Chase, Goldman Sachs, Citi, BofA and Morgan Stanley.

    What’s this about profitable?????

    • collapse expand

      Hello, Sgtdoom,

      Do you have a reference to the fact that the TARP loans are simply being paid back with securitized notes (i.e. loans)? Thanks.

      In response to another comment. See in context »
      • collapse expand

        At this site“Certain of AIG’s U.S. life insurance businesses will create SPVs that will issue $8.5 billion of embedded value securitization notes to the FRBNY (or a trust for the benefit of the FRBNY) in repayment of a portion of the outstanding balance under the FRBNY credit facility. These notes will be backed by net cash flows from the designated blocks of existing life insurance policies held by these companies.”

        Several weeks ago I could find it a number of places, but no longer. However, if you google “AIG” “securitization notes” “Artemis” you will find the cached page of those former sites.

        In response to another comment. See in context »
      • collapse expand

        Here’s another excellent site, although their claim that AIG is the first to do this, since there have been a number of insurance-linked securities and securitizations over the past 7 years, leaves me a bit perplexed. (My mistake on prev post, I had been researching Artemis, if you just google “AIG” “securitization notes” you’ll find plenty of info.)

        In response to another comment. See in context »
  13. collapse expand

    Mr. Taibbi,

    I have a question that I have asked elsewhere: Companies all over the United States are going backrupt and or laying-off employees, real estate assessed values are falling at record rates (the net assessed value of real estate in California fell for the first times since records have been kept), and foreclosure rates very high, what is source of these profits that allowing these financial institutions to repay the TARP? What did the banks &c do with the TARP capital that is now turning a profit, a huge profit? If sgtdoom is correct and the loans are simply being repaid with more loans (which is all securitized note is), then is this not just another of the many shell game / ponzi schemes that caused the finacial crisis in the first place?

    • collapse expand

      Forgive my presumption (you inquired of The Taibbi, but I’m answering)but the often cited uses for those funds are: (1) further speculation on the energy/oil and commodities markets (especially gold and silver where JPMorgan is concerned), as well as (2) the purchase of foreign speculation companies (as Goldman Sachs did), lobbying against any and all regulation, and further buying and selling of credit derivatives (hence where the superleveraging and meltdown originates).

      In response to another comment. See in context »
    • collapse expand

      Oopsy, forgot to mention another use by the banksters of those TARP funds: arbitraging the stock market.

      In response to another comment. See in context »
  14. collapse expand

    If you’re going to make an argument about propaganda in the media, you might want to choose a better example article to start with. The third and fourth paragraphs of the NY Times article are:

    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.

    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.

    • collapse expand

      Well, OK, but…wait, I don’t really see your point. If anything, my annoyance with The Times just went up a couple notches. The title of the article was “As Biggest Banks Repay Bailout Money, the U.S. Sees a Profit,” was it not? Are they contradicting the article’s premise three paragraphs into it, or is the entire point to put a happy face on a bunch of BS?

      But much more important in the annoyance-ratcheting category: those paragraphs essentially deflect blame from the very banks at the heart of this (what, no mention of Goldman Sachs, Citi, or Chase? I am shocked). I’m not a huge fan of the American car industry and their numerous misdeeds over the past seventy years, but at least they make something – real, physical products, not “financial products,” which are, by definition, absolutely nothing. The UAW got chumped, and everyone (including everyone at The Times) knows it, but what the hell? The public seems to dislike the UAW, so why not throw a little salt on their wounds? Sure, this catastrophe is in no way the fault of any Detroit assembly line worker, but let’s remind our readers that Detroit is siphoning off a bunch of their money. Goldman and Bank of America, though, let’s leave them out of it. Better yet: let’s discuss how diligently they’re repaying the American taxpayer.

      Sorry, but color me unimpressed.

      In response to another comment. See in context »
  15. collapse expand

    Me, I’ll wait until the future to count future gains and losses. I’ve heard there is some uncertainty about the future that makes it prudent to wait until it happens.

  16. collapse expand

    Nice post Matt. This is clearly a concerted PR campaign as the WSJ has its own version of the story. http://online.wsj.com/article/SB125176287995474339.html Reuters columnist Jim Saft has a nice piece debunking it. http://blogs.reuters.com/great-debate/author/jamessaft/

  17. collapse expand

    Great posts Matt. I think someone has brought it up already but the biggest propaganda is selling everyone the idea that the FED=taxpayer. The FED maybe sold as a quasi public/governmental agency etc etc but at the end of the day the ultimate shareholders are the member ‘private’ banks.

  18. collapse expand

    Although I’m not happy about the bailouts, I could have been convinced of their worth had the government attached a few more “strings” to those TARP loans. Like breaking up bigger institutions and strengthening regulatory policy.

    One of the few requirements made of these bailed out companies are new compensation rules. Although they are still somewhat weak, just the idea of them drives bank executives over the cliff. Those new rules are the reason Bank of America is trying so hard to pay back its loan — they cannot stomach having limits on employee bonuses and compensation. They will lay off employees and hike rates to consumers in order to pay off their loan and allow their absurd compensation policies to continue. It’s more than business as usual, it’s simply the only way they know how to do business.

    The core issue here — as it has been since the beginning — is greed.

  19. collapse expand


    Are you saying that DC is declaring TARP a success by only counting the profitable parts?

    That’s preposterous!

    Next, you’ll tell us that a firm can make the entire month of December disappear from quarterly balance sheets to hide their real losses!

  20. collapse expand

    Yup; the fed is rasping at some straws – any straws – to get out good news. This kind of psychological “news” was to be expected. They want folks to feel good about the economy, so any good news gets a lead.

    As i was listening to improved numbers in the housing market on NPR this morning, i was thinking a few steps ahead of the story. There was the caveat that we’re not out of the woods yet along with the mention that it’ll take awhile for a full recovery. Part of me was just exasperated. This housing-baking-economic crisis didn’t just happen in the last year of Bush’s term. Those of us who weren’t wealthy were already singing the blues about housing prices, job losses, the cost of health care – often to be criticized as negative nellies. It wasn’t until the economic downturn hurt those with the deepest coffers that all of this became newsworthy throughout the media. No surprise the quick fix helped the wealthiest first.

    There’s a long tough road to hoe, and we’d better get it right this go round (fingers crossed).

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