How Did the Taxpayer Make Out on the Wall Street Bailout?

By Pam Martens and Russ Martens: November 12, 2015

Broken Piggy BankLanding in our inbox this week was an 86 page report from the Government Accountability Office (GAO) on the current status of the Troubled Asset Relief Program (TARP). The GAO is among a growing octopus of taxpayer-funded bodies attempting to reassure the American people that their tax dollars that were used to bail out Wall Street during the financial crash are being properly tallied up. The GAO report found the following:

“While the total disbursed for TARP programs was $430.1 billion, OFS [Office of Financial Stability, an office in the U.S. Treasury Department] has collected $424.9 billion (or $442.4 billion if including the $17.5 billion in proceeds from the additional Treasury AIG shares) through repayments, sales, dividends, interest, and other income.  As of September 30, 2015, only $714 million in bank investments remain outstanding.”

Lumping dividends, interest and other income together with the repayment of principal is not really fair since money has a time-value and any investor expects to earn a return on money loaned or invested.

SIGTARP, the Office of the Special Inspector General for TARP, released its most recent report on October 28, 2015.  According to SIGTARP, as of September 30, 2015, TARP “had $35.1 billion in write-offs and realized losses…” SIGTARP adds this for good measure: “Treasury’s write-offs and realized losses are money that taxpayers will never get back.”

In addition, according to SIGTARP, the $35.1 billion in write-offs and realized losses “do not include $18 billion in TARP funds spent on housing support programs, which are designed as a Government subsidy, with no repayments to taxpayers expected.” If you add those two amounts together, that’s $53.1 billion the taxpayer is never going to get back.

The Congressional Budget Office (CBO) has its own methodology and its own view of TARP. According to its March 2015 report, it estimates that “all told, the TARP’s transactions will cost the federal government $28 billion. That estimate accounts for the realized costs of completed transactions and the estimated costs of outstanding and anticipated transactions.” CBO’s March 2015 report said that TARP had written off $50 billion in losses.

A report earlier this year from the Office of Management and Budget (OMB) put the taxpayer’s shortfall from TARP at $37 billion.

So, for starters, forget all those headlines that reassured you that TARP produced a big windfall for taxpayers, like this one from CNN: “U.S. Ends Tarp with $15.3 Billion Profit.”

Then there’s the fact that TARP was just the part of the iceberg visible above the water. The trillions in bailout loans that were invisible throughout the years of the crash, until court orders and Congressional legislation forced the data into the sunshine, was coming from the Federal Reserve. As Senator Elizabeth Warren stated to a Senate Committee hearing on March 3 of this year:

“During the financial crisis, Congress bailed out the big banks with hundreds of billions of dollars in taxpayer money; and that’s a lot of money. But the biggest money for the biggest banks was never voted on by Congress. Instead, between 2007 and 2009, the Fed provided over $13 trillion in emergency lending to just a handful of large financial institutions. That’s nearly 20 times the amount authorized in the TARP bailout.

“Now, let’s be clear, those Fed loans were a bailout too. Nearly all the money went to too-big-to-fail institutions. For example, in one emergency lending program, the Fed put out $9 trillion and over two-thirds of the money went to just three institutions: Citigroup, Morgan Stanley and Merrill Lynch.

“Those loans were made available at rock bottom interest rates – in many cases under 1 percent. And the loans could be continuously rolled over so they were effectively available for an average of about two years.”

When you are an insolvent financial institution or spinning toward insolvency, you are not able to borrow, in a free market, at below market rates in a financial crisis. You would be borrowing at double-digit subprime rates, not at less than 1 percent.

So the shortfall in what the taxpayer could have obtained in interest income is another cost to the taxpayer. In a November 27, 2011 article, Bloomberg Business pegged the income benefit of those below market rate loans to the banks at $13 billion. We think that’s a whopper of an underestimate, but if we move that figure to the estimated $53.1 billion cost in SIGTARP’s report, we’re up to $66.1 billion in costs to the taxpayer.

Then there is the cost of all of this accounting, hearings, testimony, reports, and investigations over seven years and counting. The October 28, 2015 report from SIGTARP noted the following:

“…Ebrahim Shabudin, chief credit officer at United Commercial Bank (the 9th largest bank to fail since the crisis) was sentenced to 8 years in prison for a fraud uncovered by SIGTARP that caused the bank to fail and a $300 million loss in TARP. Charles Antonucci, the CEO of Park Avenue Bank, was sentenced to 30 months in prison for a fraudulent attempt to obtain $11 million in TARP…SIGTARP’s three audits on Treasury approving excessive compensation for the top 25 employees at GM, Ally, and AIG, while they were in TARP, changed the TARP companies’ pay proposals, making them less likely to propose, and Treasury less likely to approve, large pay raises and large cash salaries.”

Try not to roll on the floor laughing over that last sentence. By the way, GM, Ally and AIG all produced multi-billion dollar losses to TARP according to the most recent SIGTARP report. (See Table 4.2 in the report.)

But the real cost of the bailout cannot currently be measured. That’s the cost of propping up failed business models like financial supermarkets that use insured deposits to engage in wild derivative gambles in London, pay rating agencies to deliver triple-A ratings, underwrite stock offerings while simultaneously putting out buy ratings to gullible investors. Because of the bailout, none of this failed model has materially changed on Wall Street. Thus, the real cost of the bailout will only be known when this failed model brings on the next crash and Bailout Round II.

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