When we wrote our story about the financial-system bailout turning a profit for taxpayers, my Fortune colleague Doris Burke and I (and our editors) decided that less was more. So we showed you our bailout numbers but didn’t give you much detail about how we calculated them.
The article has had far more resonance than we expected — it was cited by Fed Chairman Ben Bernanke at a July 13 congressional hearing as a response to allegations by Fed-basher Ron Paul, Barney Frank has cited it twice, and it generated hundreds of posts on fortune.com and washingtonpost.com.
Critics of the piece — and there were plenty, because we went against the conventional wisdom of the bailout being a financial disaster — seized on the absence of detail to assert that we’d simply made up the numbers, and that we were financial illiterates, shills for the plutocracy, in President Obama’s pocket or some combination of the above.
So now, we’re going to go into some of the details we left on the cutting-room floor.
The best summary of the supposed flaws in our article is a critique distributed last week by Bob Eisenbeis, chief monetary economist for Cumberland Advisors, who also sent it to Fortune as a letter to the editor. We’ve posted Bob’s piece and my response, which is a revised and de-jargonized version of the response that I sent to some financial sites that published Bob.
As an aside, I appreciate Bob’s civility, even though I think his numbers and analysis are badly flawed, just as he thinks mine are.
When Fortune’s editor, Andy Serwer, told me to write an article about how much the bailout cost taxpayers, I had to decide what the bailout consisted of, and what the costs and revenue from it were to taxpayers. My colleague Doris helped me gather information and fact-checked the numbers and as many assumptions as she could, but the analysis is mine.
I decided the only way to get useful numbers was to use cash: the government’s bailout outlays, less the cash it’s gotten (and is almost certain to get) from guarantee fees, selling securities it got in the process of bailing out borrowers and debt issuers, and — the most controversial part — the payments to the Treasury by the Federal Reserve of profits the Fed has made from its role in the bailout. Those bailout-related profits aren’t separated out on the Fed’s financial report — I estimated that by comparing the Fed’s pre-crisis annual payments to the Treasury for 2003 through 2006 with the payments from 2007 through 2010.
Doris and I were calculating the cash costs of the bailout to taxpayers. Repeat, cash. C-A-S-H. Not moral hazards. Not risk-adjusted dollars. We thought that it was obvious that we were measuring cash rather than using fancy metrics. We weren’t including costs or benefits from the Fed bailout programs debasing the dollar or hurting prudent savers by keeping interest rates ultra low or possibly setting the stage for future inflation. We weren’t including the job-creation benefits created by the cheaper dollar presumably reducing imports and increasing exports, or the benefits of not seeing every major U.S. financial institution fail, and of not having companies heavily dependent on short-term loans (which had dried up in the market panic) miss payrolls or go out of business. Who’s got objective, reliable, challenge-proof numbers for these things? Not us, not anyone.
And one last thing: We weren’t including the $787 billion economic stimulus package in our analysis.
We thought all this was obvious — but apparently to many people, it wasn’t.
We also thought it was obvious that we were using “taxpayers” and “Treasury” interchangeably. After all, when the Treasury spends, we call it “taxpayer money.” So when the Treasury takes in more than it spends, logic suggests it’s a taxpayer profit. Many commenters insisted there weren’t any taxpayer profits, because they hadn’t gotten a check from the government. This boggled my mind, given that they called TARP “taxpayer money” even though no one asked them to send a check to TARP.
The major difference between our number of the cost of bailing out Fannie and Freddie creditors — shareholders have been pretty much wiped out — is that we’re talking about the cash costs to taxpayers, currently $130 billion. It’s projected to shrink by the Treasury, the Congressional Budget Office and the government-appointed trustee overseeing the affairs of the now-nationalized institution.
The CBO isn’t measuring cash outlays, though. It’s calculating the subsidy to Fannie and Freddie creditors from the government guaranteeing the companies’ debt but not collecting fees commensurate with the risk. The value of that subsidy is considered a cost for federal budget purposes, and rightly so. But I was measuring regular cash dollars, not risk-adjusted dollars.
Some online posters were offended by my not accounting for the Fed’s risk of owning mortgage-backed securities and other assets that can go bad, and of owning long-term Treasury securities whose market value will decline when interest rates make their inevitable rise.
Why didn’t I account for that? Because the Fed, unlike a conventional financial institution, has endless staying power and doesn’t have to sell anything in its portfolio unless it wants to. It can wait for markets to calm down, as they have since the 2008-09 market trough. It doesn’t have to roll over short-term debt, because it can effectively print money. And its cost of funds — like the Treasury’s cost of funds on the securities it bought as part of the bailout — is essentially zero if it uses borrowed money rather than printing some. In any event, any Fed cost associated with its bailout portfolio is reflected in the size of the check it sent the Treasury.
All the securities the Fed owns as part of QE1 and QE2 would exist and be paying cash interest at government expense even if the Fed had not adopted either program.
Absent QE1 and QE2, taxpayers would get none of those interest payments. Because of QE1 and QE2, taxpayers get the interest generated by the Fed’s holdings. So I consider it legitimate to count those proceeds as bailout-related profits, and I subtract them from the cost of the bailout.
I could easily write another 1,000 words, but I’ve reached the point of diminishing returns. As in our original article: Less is more.
I’m heading for the beach in a few days. See you in September.
Sloan is Fortune magazine’s senior editor at large.