There is a bizarre article in this morning’s WSJ. It declares that the bailouts will cost less than initially feared. It is notable not for what it includes, but what it managed to completely ignore.
The 2008 Emergency Economic Stabilization Fund passed by Congress was over $700 billion dollars — not $250B.
There is no mention of the trillions of dollars on the Federal Reserve’s balance sheet. The ongoing costs of the Federal rescue of Fannie and Freddie — indeed, the complete takeover of $5 trillion in mortgages by Uncle Sam — is glossed over. The journal also seems to have forgotten about the cost of bailing out Chrysler and GM (they mention GM possibly going public, but just barely).
Foreclosure trends are increasing; second liens are defaulting in greater numbers. Banks now have over $30 billion in bad home equity loans. Somehow, these are not mentioned in determining the health of rescued banks.
Depleted FDIC reserves? Not mentioned. Bad loans on bank balance sheets? Ignored. FASB 157 authorizing fantasy bank accounting? Never mind.
The newly concentrated banking sector’s lack of competition is apparently too abstract for discussion. Nor does this final calculation so much as consider any future problems caused by moral hazard (its not so much as mentioned). Future inflation? US Dollar debasement? What TF are they?
Here’s the WSJ:
“The U.S. government’s rescue of wobbly companies and financial markets is starting to look far less expensive or long-lasting than once feared.
As momentum grows at companies that looked like zombies just a few months ago to repay taxpayers for lifelines they got during the financial crisis, the projected cost of the bailout is shrinking to just a fraction of previous estimates. Treasury Department officials say the tab is likely to reach $89 billion, which includes the Troubled Asset Relief Program, capital injections into Fannie Mae and Freddie Mac, loan guarantees by the Federal Housing Administration and Federal Reserve moves such as buying mortgage-backed securities and propping up the commercial-paper market.”
You can read the article, but you might notice it has a hole or two . . .
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Source: Light At the End of the Bailout Tunnel DEBORAH SOLOMON WSJ, April 12, 2010 http://online.wsj.com/article/SB10001424052702304846504575177950029886696.html
Profit for Banks Dimmed by Home-Equity Loss Seen at $30 Billion Dakin Campbell and David Henry Bloomberg, April 12, 2010 http://www.bloomberg.com/apps/news?pid=20601087&sid=ayhRMX.B.hJE&
BR -
Your post here is skewed. It seems they mention many of the costs you say they neglect — “GSEs $85B”, “Auto industry $28B”.
It seem like you are making up costs — “depleted FDIC reserves” — so what? These are paid, and will be repaid, by increased PRIVATE industry fees. No taxpayer here. Dont pretend there is. People love a witch hunt.
Another cost you made up — “costs of $T Fed balance sheet” — first, the Fed continues to send an elevated $100-150B/yr to the Treasury. Bernanke has clearly stated that not only does that look likely to continue but that “no SINGLE Fed asset program” looks like it will lose $1. In a way, you are double counting because the largest Fed purchases are simply Fannie/Freddie mortgage pools. Since the risk to loss on these is guaranteed by Fannie/Freddie we might as well make the interest carry for the taxpayer. This is what the Fed is doing.
Finally… the holes I notice are a likely under-counting of TARP profits. Should’nt the bank-related TARP have about $50B in profits? By my estimates they made 5% interest on nearly ALL monies lent, then they made another 5-10% profit on warrants, AND now they are up over $10B on Citi equity alone.
Where is that $50B? Why is AIG estimated to cost $50B… looks like this will also end up profitable?
Its likely that we see a greater than $100B move to the positive from here. But its good to keep estimates conservative (as they have been in the past… this number has consistent move into the green the last 18 months).
remember “deficits don’t matter” .. kinda true – to the point someone is willing to go to war over them … at that point – short and long positions change spinning gold for some and movement in the pipes for all
cash is scratchy green TP at its face invented to keep commerce moving for the fun of it all … so when are the longs and shorts going to war for their funday in the sun .. inalienable rights and justice stuff
I guess I’m getting psychic powers. When I read the post, I thought to myself that cognos was going to be very pissed at Barry for falling of the Pollyanna wagon. When I went to post same, I saw that it had already come true.
there is no denying that this article (and many others) are nothing but propaganda tools to slant the reader to a particular viewpoint. checking your facts and ensuring completeness is something relegated to the pile of history given our quasi-corporatist government complex. at least an attempt at discussing the giant gaping hole of the crap moved to the Fed’s balance sheet and the backstop of Fannie/Freddie would at least show some attempt at intellectual honesty. but that isn’t the goal after all.
The oft-criticized Ron Paul has a good take on what’s going on in DC.
http://www.creditwritedowns.com/2010/04/ron-paul-has-barack-obamas-number.html
BR lets not forget that there is 1.25 Trillion in unhedged exposure in the Fed’s SOMA fund. For each 1% rise in rates that’s a loss of an extra 100 Billion more than already assumed by buying them @100%. Courtesy of Zerohedge. http://www.zerohedge.com/article/why-fed-actively-managing-25-billion-maiden-lane-mbs-portfolio-when-its-24-trillion-soma-hol
Callistenes —
This is 100% incorrect. First the math is bad by about 2x (you lose about $60B from duration). Second you HAVE to consider CARRY.
1.25T at 5% carry is about $60B per year in Fed interest carry. Interest rates would have to increase about 2% in order to just break-even on carry + roll down.
Only read ZH if you want to lose large amounts of money.
They also didn’t mention lost interest income for the general public by rates being kept artificially low.
In a Galaxy Far Far Away: “These are not the droids you are looking for. Move along!”
In a Galaxy Oh So Near: “These are not the bailouts that are the bailouts that we’re counting as bailouts. Move along!”
In both Galaxies The Force (Propaganda) can have a strong effect on the weak minded.
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