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How Banks Repaid TARP: The Other Bailout Repayment Lie

Too big to fail banks repaid their TARP money with other bailout money.  To suggest that TARP was profitable to the taxpayer (as multiple, recent articles have suggested) is to use one-sided accounting that overlooks the 11 TRILLION dollar+ bailout nation that TARP played only a small (albeit noisy and notorious) part of.  CNNMoney (http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html) and the NYT (http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html) have detailed and itemized the GDP sized totals of the bailouts beyond TARP.  I will explain how bailout money poured into some of the less notorious programs was laundered through to repay the TARP portion.

While there are a few more moving parts to this scam, the mechanics are very much the same as the GM loan repayment lie (http://seekingalpha.com/article/200137-gm-loan-repayment-mischaracterization-at-best-lie-at-worst), essentially moving publicly financed money from one pot to another.  The trick here is to identify the pots and understand how they work.

  1. Borrow $1 at 0%, lend $10 against it at 3-4%:  The biggest item not on the CNN or NYT breakdown is a Federal funds rate of 0%.  This has enabled banks to "borrow" from the Fed at 0%, and then "lend" it to the taxpayer at 3-4% (http://www.bloomberg.com/apps/news?pid=20601103&sid=aucooSmI6UQQ).  Given fractional reserve banking rules they can multiply these spreads by a factor of 10.  If you're wondering how a failing bank can make a huge positive spread lending money to the exact same entity that bailed them out (Treasury and the taxpayer) so am I.
  2. Raising capital under the "too big to fail" guarantee:  Selling stock is much easier when the government has repeatedly said you won't be allowed to go out of business.  This is a key reason why smaller banks have not been able to raise the capital to repay TARP.
  3. Fannie and Freddie are banks' garbage cans:  Banks sold most of their bad loans to Fannie and Freddie, where they are now festering and losing money like hot garbage.  Very little of the actual residential loans were kept on banks' balance sheets.  The heavy losses are coming from the heavy holders.
  4. The Great Abyss of AIG:  Throw $100B+ down one end of AIG, and kick it out the other end to Goldman Sachs and various European headquartered banks.
  5. Trash for Cash, TAF and TALF:  You give us "hard to sell assets" (trash).  We give you cash.  Can I get that deal on the junk in my basement?
Finally, if TARP has been so "profitable," why is the federal government projected to run deficits equal to or greater than 10% of GDP for as far as the eye can see?  On that question alone the idea of the bailout being "profitable" falls apart.  Misunderstanding of these facts is dangerous.  It increases the probability of a future bank bailout, and it decreases the probability those responsible for this one get removed from power.







Disclosure: no positions