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More Bogus Bailout Reporting: “As Big Banks Repay Bailout Money, U.S. Sees a Profit”

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Clearly, the spin is in. As a post earlier today discusses, the Financial Times is running a story that claims that the Fed made money on its rescue programs, then slips in all the tidbits in the body of the article to let discerning readers know that the reporter understands that the analysis is utter rubbish while looking like it is not crossing the Fed.

In a simply remarkable coincidence of timing, the New York Time running a story with the very same message, namely that bailouts are good for taxpayers because the Treasury has made money on the TARP.

If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?

Now to the intellectually bankrupt New York Times story. Here is how it determined the TARP was making money:

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

Help me. Credit 101 is that your best borrowers repay first (unless you gave them overly generous terms, of course, then they might hang on to the proceeds). A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.

In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.

Moreover, the piece contains a huge canard:

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

Roger Ehrenberg already dispatched this goofy idea with admirable zeal:

The US taxpayer has been systematically looted out of hundreds of billions of dollars….Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.

Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm….. Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion… $1.1 billion…Hmm…something doesn’t seem right. You know why it doesn’t seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….

But no, if you subscribe to the world according to the New York Times, you’d think we the long suffering taxpayer got a really good deal. By extension, we should be really happy if financial firms throw themselves off the cliff again en masse, since that will give us all the opportunity to make even more money by rescuing them!

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41 comments

  1. bb

    something else you have overlooked: this ‘profit’ shows up on the Fed’s income statement. what is the value of their contingent risks associated with their alphabet soup programs? it is valued at 0.
    what is the value of crippling the economy and requiring ever higher taxes to make good on the ‘full faith and credit of the united states government’? valued at 0. do not forget, though, the Fed is not a government agency by definition.

  2. Marsha

    Looks like this was cooked up by PR folks who needed to tell a positive story what with all the difficulty the White House is having with health care. The timing supports that contention – it’s a sop for the public.

  3. eh

    If you look superficially at the direct investment made in certain institutions, investments that either were then, or have since been converted to, common shares, then because the stock prices have risen rather dramatically in some cases you could say those direct investments were profitable. But, yes, to ignore the indirect bailout of AIG in that is disgraceful.

    The ‘TA’ in TARP stands for toxic assets. What’s going on with those? How have they been ‘relieved’? Are they less toxic these days? From the news flow about foreclosures, job loss, etc you would think not. Have so many banks really earned so much in such a short period of time that their balance sheets have been repaired? You never hear anything about the proposed PPP anymore. That seems fishy to me.

  4. Patrick Neid

    Krugman should have a peice up shortly touting this profitability as further reason for a second stimulus!

  5. Dikaios Logos

    I doubt the press is formally controlled, but it is sick. I am found of reminding people that the big media is where you go from Harvard/Yale/Princeton if you didn’t go into banking or consulting. A few decades ago, reporting had a lower-middle class air and so clearly pursued the failings of the ruling class. At present many reporters have much too much sympathy for authority figures in society simply because they are too close to them. They are the same people.

  6. attempter

    I’ve long regarded the NYT business section as a second op-ed page. (The difference is that the official op-ed page at least pretends to give a cross-section of points of view, although it really does not.)

    A year ago I was still sympathetic to the plight of the newspapers in the face of the new media, and of aggregators and so on.

    But no more. I’m satisfied that a big part of their travail is self-inflicted, because more and more people know how captured and bogus the MSM ideology is.

    I do love the irony that they’ve done this in order to satisfy advertisers, but without avail – revenues keep declining. I could have told them, stick with a good product, keep the loyalty of an intelligent readership, and that’s your best chance to keep ad revenue up.

    But no…It’s alot like today’s Democratic party, and Obama himself.

    There was one good piece in the NYT today, on a no-nonsense foreclosure judge who sticks it to the big banks who come before him with sloppy paperwork and nebulous ownership concepts.

    Apparently they were trying to blame the system, in some sense of “that’s just the way it is”, since he felt called upon to quote Shakespeare at them:

    “The fault is not in our stars but in ourselves..”

    Perhaps the NYT and the rest of the MSM need to consider that same message.

  7. Bruce Krasting

    Yves, Never ever believe in coincidence. It certainly never happens when it comes to news reporting. Both of the stories (NYT/FT) are plants.

    I wrote the NYT just now asking them this question. I doubt that they will respond. Not necessary. There is no such thing as coincidence.

    bk

  8. Glenn Atias

    So great, if bailouts are so profitable, then let’s cut taxes. Better yet, let’s just abolish the income tax and do bailouts.

    We’ll just bailout every single institution that made bad bets, would have otherwise failed, and then we can all live high on the hog off the big profits!

    Bubble Blowing Ben and the MSM are dancing as one, and for this we will all pay the price soon enough.

  9. Kid Dynamite

    the spin is in? the spin has been in for 12 months! it’s been the most remarkable propaganda campaign i have ever seen – no negative headlines allowed – every data point must be spun positively!

    how about this one Yves:
    http://www.reuters.com/article/newsOne/idUSTRE57U0BF20090831

    “The Federal Reserve has made $14 billion in profits on loans made in the last two years, The Financial Times reported on Monday, citing officials close to the matter.”

    “If the Fed had invested the same amounted loaned out in three-month Treasury bills since August 2007, it would have earned $5 billion in interest, the FT said.”

    as if the Fed’s alternative was to purchase Treasuries!! Oh… My….

  10. rd

    I read the story and came to three conclusions:

    1. The Ben bernanke Pawn Shop is doing a decent job on the day to day management of the decent assets that came in during his “throw in the kitchen sink” liquidity development program;

    2. The Ben Bernanke Pawn Shop has only been accounting for the nice stuff that they can display in the front window. The accounting of what is in the dumpster out back will wait for another day.

    3. The Paulson-Geithner Dynamic Duo did a lousy job negotiating their various bail-out deals with the big banks. They probably left $10s of billions on the table in their rush to make sure that their drinking buddies would not be made homeless.

  11. LeeAnne

    On a ‘controlled press’ the prospective changes when we accept what is right in front of our faces; that we are in the final stage of the coup that occurred with the Supreme Court appointment under Rehnquist of Bush that has now been completed with the appointment of Bernanke.

  12. mitchw

    Chill Yves, I saw those headlines and instantly called Bull. I’m no money savant, went to one of those baddy schools, yet wasn’t even bothered to read any article beyond your critique.

  13. Alexandra

    Excuse me, but there are several things wrong with FT and NYT stories.
    First, the TARP money was provided by the taxpayer through the Treasury. So if any profits have been made, it belongs to the Treasury and ultimately to the taxpayer.
    Second, the ‘profits’ made by TARP have probably (certainly) been or will be financed by the taxpayer as well – through several alphabet soup Fed bailout programs.
    They really must be thinking that other people, i.e. non elite and non-insiders, are all idiots otherwise they would do a better job hiding this crap.

  14. But What do I Know?

    Isn’t this Lenny Dykstra accounting–only counting the “winners” because those are the trades you have closed (for a small profit), while ignoring the losses on the “temporary” losers because they haven’t be closed yet. Lenny claimed his options strategy was making huge profits as well, but apparently they weren’t large enough to keep him out of bankruptcy court.

    The only good news here is the BS smells so bad that many people will discount the headline. . .

  15. David Habakkuk

    Of course the reporters and editors have difficulty thinking critically — at the root of the problem is that most of them have assimilated a belief system. In his Atlantic Monthly article ‘The Quiet Coup’ back in May, Simon Johnson wrote:
    ‘In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption — envelopes stuffed with $100 bills — is probably a sideshow today, Jack Abramoff notwithstanding.
    ‘Instead, the American financial industry gained political power by amassing a kind of cultural capital — a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.’
    (See http://www.theatlantic.com/doc/200905/imf-advice.)

    And indeed the consensus that this was the root to economic success spread far beyond the U.S. — with journalists on papers like the NYT and FT as cheerleaders. Accordingly, it is less than entirely surprisingly that they easily allow themselves to become entangled in the gamble underlying the approach to the crisis prevalent in the West — that, as Johnson put it more recently, ‘the road to recovery runs parallel with pretending there are no problems.’

    Unfortunately, his ability to exploit his own correct analysis is limited by his own attempt to deal with questions about belief systems in economist’s terms — ‘amassing a kind of cultural capital’. This does not greatly help in making sense of matters like the disintegration of inhibitions on elites in the U.S. — and my own country, the U.K. — over the past decades.

    To understand this, one would need a better understanding of what the roots of old inhibitions were — which would have to reckon with notions like ‘propriety’, a word which has surfaced in several interesting remarks by Yves Smith on these matters. Highly generalised remarks about more or less ‘primitive’ political systems are also not really much help.

  16. Siggy

    I believe that the stories are plants. Kasting has it right and it is quite improbable that he will get a forthright answer.

    What these stories imply is that this administration holds an extremely cynical view of the body politic.

    For those less familiar, what you are seeing and being exposed to is the exercise of ‘Chicago Clout’. That’s where Emanuel and President Obama come from, the Chicago Democratic Party which does it’s dammdest to never waste a good crisis!

  17. jay22

    The article kind of covers all the problems you have with it.

    It talks about how much else is out there. It mentions that many think the gov’t received much less than they should have and the article seems to accept that as a fact, not just an opinion.

    It was definately a positive piece, but did you read the whole article?

    Would a company be wrong to use the word profit if they mention that they were profitable on a dozen customers even though there are alot of unknowns surrounding the other 100 customers? It would be wrong to pretend the other 100 dont exist but the article did cover those in paragraphs 3 and 4….you didnt even have to go very far.

  18. Ina Pickle

    The question I have is: if they declare a profit, does that money get circulated back into the TARP? I remember that Congress completely failed to limit the funds in the TARP to those that were originally dispersed, but I can’t remember if I ever saw an answer on the question of whether the funds could be recycled endlessly into new black boxes. I suspect that is the case, and I am certain that is Turbo Timmy’s opinion of the matter.

    FT is the only thing I bother to read any more, and even it isn’t what it once was. We get the local paper because we have a bird cage (and need to clip coupons).

  19. albrt

    “By extension, we should be really happy if financial firms throw themselves off the cliff again en masse, since that will give us all the opportunity to make even more money by rescuing them!”

    Good, because that is exactly what Geithner and Bernanke appear to have planned for us.

  20. ernest

    this is all wonderful news to all those naive enough to consider stepping back into equities..

  21. Expat

    Ha! the $15 billion “profit” will probably be used to pay for $150 Halliburton hamburgers in Iraq and Evian water for upper-class victims of enhanced interrogation techniques. Of course, it will also be needed to fund the drop in tax receipt on bonuses which will take effect because of the way they are now structured. Ha, ha, the money is going right back to GS!

    ha ha ha ha ha, oh God, I can’t breathe..ha ha ha

  22. K Ackermann

    On a risk-adjusted basis, Uncle Sam got taken to the cleaners.

    No – we got taken to the cleaners. Uncle Stupid never gave us a chance.

  23. JD

    Am I reading the Times correctly, that they calculate the warrant repurchase as a profit to the government?! At least the author also gave Linus Wilson’s analysis – which calculates the profits if the government had simply exercised the warrants instead of giving them back. Nevertheless, I agree Ehrenberg has it right.

  24. jstratt

    Good Article!

    One would have to assume Trillions have been lost. Lets see GM, Chrysler, FNMA, FRMC, AIG, LEH, C, PPIP, TARP etc.

    The NY Times article was a planted article for politicians because of the populist anger. GS told the government what they were going to do and did it. Financially speaking they own the government and taxpayers are paying their bonuses.

    They will announce shortly that they are going private so that what they do is hidden once again.

  25. Rickstersherpa

    For a more objective and critical view, here is Dean Baker’s column in the Guardian. For obvious reasons Dean is apparently barred from appearing as an opinion writer on the Washington Post, WSJ, or NY Times editorial pages.

    http://www.guardian.co.uk/commentisfree/cifamerica/2009/aug/31/banking-profits-us-economy

    “Most of us work for a living, the rest are bankers. These days the news is filled with great tales about how America’s banks are coming back.

    Even that giant corpse Citigroup is showing signs of life. Its stock is now selling for more than five times the lows it hit earlier this year. Its market capitalization is up near $57bn, a bit more than the $45 billion that the government lent them through the Troubled Assets Relief Programme, or Tarp. Some are even expecting that the government will make a profit on its Citigroup investment.

    These hopes are probably somewhat premature. Citigroup still has many bad assets on its books which it has not yet written down. Furthermore, the government is directly on the hook for $300bn of these bad assets, having offered a guarantee as part of its “December Citigroup Rescue Special”.

    In this case, Citigroup may be able to prevent losses and boost the value of its government-owned stock because the government is picking up its bad debts. This is a case of money going into one pocket but out of the other one; that’s not the way that most investors make money….”

  26. anon

    Did you actually read the NYT piece?

    “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.”

  27. Kalpa

    The articles didn’t surprise me and were more of the same. The real story here, I thought, was Yves statement about a pernicious controlled press. I have had those feelings daily for months, as I gather news for my blog with the “green shoots” articles. There they are day after day, source after source, without fail.

    Financial News Express (8/31):

    [...]when I ran across some writing by Yves Smith at Naked Capitalism that so resonated with me, that hit the nail on the head so squarely, that I was so glad to see in writing by someone of her caliber[...]I can never figure it out, other than that they are originating from some central command station.[...]

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