Will the U.S. Make Money on the Bailout?

Jim Surowiecki is quite sure that Treasury's bailout plan, or at least the $250 billion part of being spent on recapitalization, is an investment rather than an expenditure:

I realize that, given the way the U.S. budget is accounted for, it's accurate to say the $250 billion package is increasing the deficit. But it'd be good to see some acknowledgment that in this case, "spending" that money is going to make the government richer, not poorer.

Richer? I doubt it. The U.S. has past history here: The S&L bailout, which was smaller than this one, ended up with a cost to the government 3.2% of GDP.

Bank bailouts in other developed countries have had similar fiscal results: Norway's bank crisis of 1987 cost the government 8% of GDP, the Finnish bank crisis of 1991 cost 11% of GDP, and Japan's bank crisis from 1992 onwards cost a whopping 20% of GDP. If you consider South Korea a developed country, its bank crisis of 1997 cost more than 26% of GDP. And bank bailouts in developing countries can be much more expensive still.

All these figures come from a 2000 World Bank report entitled "Controlling the Fiscal Costs of Banking Crises"; its authors, Patrick Honohan and Daniela Klingebiel, write that

Fiscal costs are systematically associated with a set of crisis management strategies. Our empirical findings reveal that unlimited deposit guarantees, open-ended liquidity support, repeated recapitalizations, debtor bail-outs and regulatory forbearance add significantly and sizably to costs.

Sound familiar?

Adrian Ash was on this back in March, citing I think a different version of the same paper:

On average, the World Bank economists found, "governments spent an average of nearly 13 percent of GDP cleaning up their financial systems" as a result of the bailout programs they tried to implement.

"Indeed, each of the accommodating measures examined," they continued, ..."appears to significantly increase the costs of banking crises."

None of this is to say that Paulson's recapitalization plan is a bad idea. But the probability that it's going to end up making a profit is pretty low, if past experience is any guide.

Comments

[Pipo:]

Jim Rogers says that this bailout is a huge mistake and nobody will profit from it.

jimrogers-investments....

2008 Oct 21 09:07 AM

[Smarty_Pants:]

The only people who will profit from the bailout are the banksters that recklessly gambled with borrowed money.

You know, the ones who got all those multi-million dollar bonuses, huge stock option packages, and golden parachutes. Guys like Hank Paulson, former CEO of Goldman Sachs.

Everyone else will lose on the deal. Count on it.

2008 Oct 21 10:05 AM

[Kilgore:]

The only way the US wouldn't at least break even would be if all the major banks like GS & C turned out to have massive amounts of CDS exposure on their balance sheets that we don't know about. If that were the case, then, of course, the $700BN would just get flushed down the toilet.

But I really don't think Bush or Paulson would put taxpayer money at risk if the banks really had trillions of dollars of exposure to those swaps. It wouldn't make any sense.

2008 Oct 21 10:48 AM

[Lex Luz:]

Not only will the $700 Billion be flushed down the toilet, but the next $700 Billion and the $700 Billion after that, followed by untold trillions more will also be flushed down the toilet.

Paulson and CashCarry will make billionaires of a few more of their friends and everyone else in the US will eat sh*t. This is the swindle to end all swindles.

2008 Oct 21 10:53 AM

[genco:]

I can't help but disagree. This bailout is the 'mother of all vulture funds.' Has anyone noticed the spreads (250+) that the Fed is getting on the 28, 56 and 84 days loans they make. They do this a few times per week. Also, please take note that the paper the treasury is issuing to do this matures before the fiscal year end. This is for openers.

When they start buying mortgages it will only get better. The government may not be able to mess this one up. This is a deficit reduction package in the long run.

2008 Oct 21 11:31 AM

[PastTense:]

If the U.S. had demanded the same kinds of returns that Buffet got (10% preferred stock plus warrants), the U.S. might have done OK--but clearly the current bailout was simply designed to transfer the losses from the banking sector to the federal government.

2008 Oct 21 11:33 AM

[thedozer:]

Will the US make money on the bailout?

since it prints it... YES

Will it be worth anything?
NO

2008 Oct 21 03:03 PM

[J-Man:]

Why didn't Paulson insist on some controls on the banks, particularly with respect to dividend payouts and bonus payouts. Morgan Stanley and goldman Sachs were each given an infusion of about $10 Billion from the government as part of the 9 institutions who were told to take the money - it so happens that $10 Billion is just about what Goldman and Morgan Stanley will each pay out at the end of this year in bonuses to their bankers and traders. Why are we funding their bonuses??? At any other company, if they don't have the money to pay bonuses, they wouldn't get bonuses. This makes no sense, and once again shows Paulson to be a fool.

2008 Oct 22 08:50 AM

[PainfullyAware:]

The Bailout was larceny on the grandest scale.

The language was so vague and the oversight stipulations reprehensible.

A summary of the bill:

Treasury gets the money, writes the rules, decides who it wants to bailout (Vague implications of bailing out foreign companies as well), Allowed to set their own premiums, Allowed to pay full price originally paid for assets insured, Financial Stability Oversight Board are the same people who get to write the rules (consists of appointments and members who helped create the problem), Congress gets reports but no say, congress has to Agree to deny more funding (just like congress gets their pay raises), and other fundamental flaws.


This is The Fox Guarding The Hen House In All Respects.

The raking over the coals of the American Tax payer has just begun.

2008 Oct 22 01:30 PM

[rm:]

[This bailout is the 'mother of all vulture funds.']

It may be the "mother" in terms of capitalization, but there are already plenty of vulture funds with ready funds who don't like the pricing on most of this junk.

"Too big to fail" now leads to "Too big to care what price you pay."

2008 Oct 23 10:55 AM