It’s always nice to start a year by using the right numbers, especially if they are upbeat ones. So let’s start 2015 with the good news that U.S. taxpayers are far more ahead on the financial bailout than almost anyone realizes.
Let me explain. In mid-December, when the Treasury unloaded its final shares of Ally Financial, its last major Troubled Asset Relief Program (TARP) holding, and declared the books more or less closed, it said that U.S. taxpayers had made $15.6 billion. That touched off a debate about what that $15.6 billion bailout profit meant.
But you know what? By my math, that $15.6 billion is only about
Conflating TARP with the total bailout is a classic example of how politicians and the media often obsess about politically sensitive numbers while far more meaningful real-world numbers are ignored. Congress had to approve the high-profile, controversial program, making it intensely political. But the real guts of the bailout — backstopping the world financial system, driving down interest rates, preventing mortgage-finance giants Fannie Mae and Freddie Mac from defaulting on their massive debts — were administrative actions that didn’t need congressional approval. Thank God.
TARP, which peaked at $411 billion despite having been authorized to spend $700 billion, was less than 3 percent of taxpayers’ bailout exposure, which totaled $14 trillion. (Details, from a 2011 piece I wrote for Fortune magazine, are in the box adjacent.)
The actual taxpayer profit on the bailout is about $350 billion, by my math. That’s right, $350 billion. All in cash, most of which has held down the federal budget deficit over the past six years. That’s serious money, even by today’s standards.
Where is my $350 billion number from? I’m glad you asked. I start with the $15.6 billion TARP number. Then I add the cash profit that taxpayers have made on the Fannie-Freddie bailout. That’s $37.9 billion, according to the most recent numbers from the Federal Housing Finance Agency — the difference between the $187.5 billion that taxpayers advanced to Fannie and Freddie when they were in extremis, and the $225.4 billion that the firms have paid the Treasury. That brings the total to $53.5 billion.
Now we come to the big and nonobvious number: the excess profit that the Federal Reserve has made from the bailout, and given to Treasury. The Fed has added trillions of dollars of securities to its balance sheet as part of its various programs to put cash into the world financial system and hold down interest rates to help the economy. The Fed did this by creating money out of thin air and using it to buy interest-bearing securities. That interest is pure profit to the Fed — and the Fed, by law, turns over its surplus profit to Treasury.
As you can see from the table accompanying this column, the Fed’s annual payments to Treasury began rising sharply in 2009, when the central bank began loading up its balance sheet in earnest.
Before the big balance-sheet expansion, the Fed had been turning over about $30 billion of profit a year to Treasury. But in the past six years, it has turned over a total of about $474 billion, according to Stone & McCarthy Research, a well-regarded Fed-watching firm based in Princeton, N.J.
The difference between that total and the $30 billion-a-year regular number is $294 billion. Throw that into the mix and you are up to $347.5 billion. Which is close enough to $350 billion for me — especially since the Fed, Fannie and Freddie are still sending profits to Treasury.
I’m leaving out some relatively minor bailout items — such as guarantee fees that Treasury and the Federal Deposit Insurance Corp. got for backstopping various investments, and the cost of providing special income-tax deals to companies such as General Motors that became majority-owned by the government as part of the bailout. Those items more or less net out against each other.
Please understand that I’m not saying the bailout was wonderful or perfect, or that I like the fact that prudent savers are still earning essentially nothing on their money, thanks to the Fed’s near-zero interest-rate policies. What I’m trying to do is to give you real numbers about how the U.S. taxpayers have done, as opposed to the numbers that you probably have seen or probably believe.
Also, for the record, in many cases shareholders of bailed-out firms — especially AIG, Fannie and Freddie — were essentially wiped out, as they should have been. Absent the federal bailout, those firms would have gone into bankruptcy, and their shareholders would have gotten nothing. That’s why I hope the lawsuits claiming injustices in the cases of Fannie, Freddie and AIG get thrown out, which would be the economically and socially just outcome.
On a risk-adjusted basis, even $350 billion isn’t that big a profit, given the huge downside the government had. But having U.S. taxpayers make money while saving the financial world from collapse is a lot better than having them lose money. And a $350 billion (and growing) profit is a lot better than a $15.6 billion profit. Happy New Year.
Here are the profits that the Federal Reserve has sent to the Treasury for the past 10 years. The numbers started rising sharply in 2009, when the first round of quantitative easing took place. That’s why I attribute all of the 2009-2014 payments above $30 billion a year to the bailout.
Source: Stone & McCarthy Research, from public filings
|Federal Reserve||$3.8 trillion|
|Treasury programs||$3.5 trillion|
Estimate of Fannie/Freddie debt when companies were nationalized, less Fannie/Freddie securities held by Treasury and Federal Reserve.
Includes Treasury guarantees on $3.35 trillion of money-market mutual funds and $150 billion of mortgage-backed securities. Treasury says its commitment to cover money-fund losses was limited to $50 billion, but it’s inconceivable that it would have let money-market fund holders take losses, because that would have started the panic the guarantee program was created to stop.
Fed: Largest daily use of each of its new liquidity facilities, plus special loans to AIG, plus exposure to assets in Maiden Lane partnerships, plus QE 1&2
FDIC: Maximum exposure of $350 billion for its debt-guarantee program, $830 billion for providing deposit insurance on business bank accounts, and $500 billion for increasing retail deposit coverage to $250,000 from $100,000.
TARP: Public records