The Bailout of Big American Banks Has Cost Trillions More Than We've Been Told → Washingtons Blog
The Bailout of Big American Banks Has Cost Trillions More Than We've Been Told - Washingtons Blog

Thursday, May 13, 2010

The Bailout of Big American Banks Has Cost Trillions More Than We've Been Told

Granted, the $700 billion dollar TARP bailout was a massive bait-and-switch. The government said it was doing it to soak up toxic assets, and then switched to saying it was needed to free up lending. It didn't do that either. Indeed, the Fed doesn't want the banks to lend.

True, as I wrote in March 2009:

The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

  • A lot of the bailout money is going to the failing companies' shareholders
  • Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives"
  • The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
And as the New York Times notes, "Tens of billions of [bailout] dollars have merely passed through A.I.G. to its derivatives trading partners".


In other words, through a little game-playing by the Fed, taxpayer money is going straight into the pockets of investors in AIG's credit default swaps and is not even really stabilizing AIG.

But the TARP bailout is peanuts compared to the numerous other bailouts the government has given to the giant banks.

And I'm not referring to the $23 trillion in bailouts, loans, guarantees and other known shenanigans that the special inspector general for the TARP program mentions. I'm talking about more covert types of bailouts.

Like what?

Guaranteeing a Fat Spread on Interest Rates

Well, as Bloomberg notes:

The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks, said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.

Harry Blodget explains:

The latest quarterly reports from the big Wall Street banks revealed a startling fact: None of the big four banks had a single day in the quarter in which they lost money trading.

For the 63 straight trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) made money trading for their own accounts.

Trading, of course, is supposed to be a risky business: You win some, you lose some. That's how traders justify their gargantuan bonuses--their jobs are so risky that they deserve to be paid millions for protecting their firms' precious capital. (Of course, the only thing that happens if traders fail to protect that capital is that taxpayers bail out the bank and the traders are paid huge "retention" bonuses to prevent them from leaving to trade somewhere else, but that's a different story).

But these days, trading isn't risky at all. In fact, it's safer than walking down the street.


Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What's more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits--by borrowing from the taxpayer and then lending back to the taxpayer.

The government's zero-interest-rate policy, in other words, is the biggest Wall Street subsidy yet. So far, it has done little to increase the supply of credit in the real economy. But it has hosed responsible people who lived within their means and are now earning next-to-nothing on their savings. It has also allowed the big Wall Street banks to print money to offset all the dumb bets that brought the financial system to the brink of collapse two years ago. And it has fattened Wall Street bonus pools to record levels again.

Paul Abrams chimes in:

To get a clear picture of what is going on here, ignore the intermediate steps (borrowing money from the fed, investing in Treasuries), as they are riskless, and it immediately becomes clear that this is merely a direct payment from the Fed to the banking executives...for nothing. No nifty new tech product has been created. No illness has been treated. No teacher has figured out how to get a third-grader to understand fractions. No singer's voice has entertained a packed stadium. No batter has hit a walk-off double. No "risk"has even been "managed", the current mantra for what big banks do that is so goddamned important that it is doing "god's work".

Nor has any credit been extended to allow the real value-producers to meet payroll, to reserve a stadium, to purchase capital equipment, to hire employees. Nothing.

Congress should put an immediate halt to this practice. Banks should have to show that the money they are borrowing from the Fed is to provide credit to businesses, or consumers, or homeowners. Not a penny should be allowed to be used to purchase Treasuries. Otherwise, the Fed window should be slammed shut on their manicured fingers.

And, stiff criminal penalties should be enacted for those banks that mislead the Fed about the destination of the money they are borrowing. Bernie Madoff needs company.

There is another type of guaranteed spread that allows the giant banks to make money hand over fist. Specifically, the Fed pays the big banks interest to borrow money at no interest and then keep money parked at the Fed itself. (The Fed is intentionally doing this for the express purpose of preventing too much money from being lent out to Main Street. That's just dandy.)

The giant banks are receiving many other covert bailouts and subsidies as well.

Too Big As Subsidy

Initially, the fact that the giant banks are "too big to fail" encourages them to take huge, risky gambles that they would not otherwise take. If they win, they make big bucks. If they lose, they know the government will just bail them out. This is a gambling subsidy.

The very size of the too big to fails also decreases the ability of the smaller banks to compete. And - since the government itself helped make the giants even bigger - that is also a subsidy to the big boys (see this).

The monopoly power given to the big banks (technically an "oligopoly") is a subsidy in other ways as well. For example, Nobel prize winning economist Joseph Stiglitz said in September that giants like Goldman are using their size to manipulate the market:

"The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."

Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."

The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorted the markets - making up more than 70% of stock trades - but which also let the program trading giants take a sneak peak at what the real (aka “human”) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).

Goldman also admitted that its proprietary trading program can "manipulate the markets in unfair ways". The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.

In addition, the giants receive many billions in subsidies by receiving government guarantees that they are "too big to fail", ensuring that they have to pay lower interest rates to attract depositors.


The government's failure to rein in derivatives or break up the giant banks also constitute enormous subsidies, as it allows the giants to make huge sums by keeping the true price points of their derivatives secret. See this and this.

Toxic Assets

The PPIP program - which was supposed to reduce the toxic assets held by banks - actually increased them, and just let the banks make a quick buck.

In addition, the government suspended mark-to-market valuation of the toxic assets held by the giant banks, and is allowing the banks to value the assets at whatever price they desire. This constitutes a huge giveaway to the big banks.

As one writer notes:

By allowing banks to legally disregard mark-to-market accounting rules, government allows banks to maintain investment grade ratings.

By maintaining investment grade ratings, banks attract institutional funds. That would be the insurance and pension funds money that is contributed by the citizen.

As institutional money pours in, the stock price is propped up ....

Mortgages and Housing

PhD economists John Hussman and Dean Baker (and fund manager and financial writer Barry Ritholtz) say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.

Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this, this and this).

And see this and this.

Foreign Bailouts

The big banks - such as JP Morgan - also benefit from foreign bailouts, such as the European bailout, as they are some of the largest creditors of the bailed out countries, and the bailouts allow them to get paid in full, instead of having to write down their foreign losses.

These are just a few of the secret bailouts programs the government is giving to the giant banks. There are many other bailout programs as well. If these bailouts and subsidies are added up, they amount to many tens - or perhaps even hundreds - of trillions of dollars.

And then there is the cost of debasing the currency in order to print money to fund these bailouts. The cost to the American citizen in less valuable dollars will be truly staggering.


  1. do americans know this?
    what need of censorship if americans are too foxtold, avatared or cbn'd to come to grips with this?
    Ah ... the age of impotence... like battery hens.. fattened for the slaughter.
    Where has the founding fathers spirit gone? the fight for justice?
    like odysseus lotus eaters, comfortably drugged.............


  3. Sanctioned guardians of the public weal have been bought off, -been distracted by their pornographic pique -or other mindless human interests.

    Extemporaneous guardians of the public weal have been ignored and heralded as brilliant but ineffectual, -interesting, but not in charge, and not likely ever to be put in charge, even if it were possible for them to better the circumstance. It is not possible.

    And the future greets us all with a matter-of-fact, hello-goodbye, before it's all over and done with again, even worse than before, further down the same path of the good intentions of modernity, -to hell in a hand-basket, led by great authority, -Princeton nonetheless- and even greater promises, always greater promises, -unkept.

    Look at the fantastic collection of -ad hoc- fixes described in this article, each well thought through by those that benefit from them, and each supposedly for the public weal.

    It is called Pragmatism. It is as old as the Enlightenment. It is built-up like a house of cards. These flimsy make-do manufactures periodically come tumbling down, in greater and lesser degrees.

    The choice -unaddressed- here, is whether to tear it all down to the foundation, or to simply try and rebuild it better upon the same shifting sands.

    Forward or backward? Backward or forward?

    The difference is that this is even bigger than the Great Depression. The greed is bigger. The audacity is bigger. The academics are bigger. The anger is bigger. The collapse is bigger. The populations and their inter-dependence are bigger.

    An old gent told me of the Depression here in Aroostook County in far northern Maine; that no one starved like people did in the city. He said virtually everyone worked on a farm in Aroostook County in those days. These were all still horse-drawn-equipment farms. And they all had chickens, pigs, cows, a garden, and acreage from which they cut their firewood in good times -and- lean.

    He remembered walking to the school house a quarter mile from his home. He remembered wrapping his feet in wool, because no one could afford a pair shoes and all the hand-me-downs had long sense been used-up.

    Those were simpler times. But imagine if you will, the lack of economy that must have swept over the nation, that the family of this poor, young, Aroostook County farm lad couldn't afford shoes. He remembered going to school in the winter with no shoes.

    It seems almost quaint, when he told me this story in roughly 1988.

    Everyone in Aroostook County found work then, if they wanted work. There was no minimum wage. Everyone worked on the farm, -for pennies a day, -or nothing at all, -but the good will of a neighbor or the rest of the family -some less fortunate than others in their health -or their dependencies.

    But THEY kept themselves fed and warm.

    The city-folks starved and froze to death in droves.

    Some died because the shoes they were wearing looked the right size for some other fella.

    A Depression is the best time to be filthy stinking rich.

    A Depression is the good time to be young, healthy and live on a farm.

    Other than those to stations in life, a Depression is not the best time for much else.

    A Depression is what brought the Bolsheviks to power. Stalin, my friends, is a product of the Depression. This Depression will create many similarly strong men.

    But do not fool yourself. This is not 1929. No war will end this Depression. It WILL go on forever. This is the end of a pragmatic era.

  4. a,
    you can write. now, write a name. any
    name, just not anon..

  5. The only way to stop this is through publicly funded elections and a possible impeachment of sitting Supreme Court justices. The billions that flow through Congress and the White House allow this behavior to continue. Thanks for getting this information out there. It's work like this that is essential for the education of our country.

  6. Concerning the Treasury Department "encouraging" banks to buy up their competitors, I suspect they were compelled by law to do so (throw me in the briar patch said brair rabbit).

    When I was researching the Clinger-Cohen act that consolidated the power of government in the office of the OMB with all of the CIO Technocrats reporting to him, I found the section in law below. Please note, that while it says manufacturing, recall that Gregory Mankiw redefined fast food restaurants as manufacturing on the basis of the assembly line. With that kind of logic, you can declare anything as manufacturing to take advantage of government authorized (aided and abetted) monopoly building.

    15 U.S.C. 278g-5 - Enterprise integration initiative.

    (a) Establishment The Director shall establish an initiative for advancing enterprise integration within the United States. In carrying out this section, the Director shall involve, as appropriate, the various units of the National Institute of Standards and Technology, including the National Institute of Standards and Technology laboratories (including the Building and Fire Research Laboratory), the Manufacturing Extension Partnership program [1] established under sections 278k and 278l of this title, and the Malcolm Baldrige National Quality Program. This initiative shall build upon ongoing efforts of the National Institute of Standards and Technology and of the private sector, shall involve consortia that include government and industry, and shall address the enterprise integration needs of each United States major manufacturing industry at the earliest possible date.

  7. Revolution now or revolution later...


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