“Not one major Wall Street executive went to jail for destroying our economy in 2008 as a result of their greed, recklessness and illegal behavior. No. They didn’t go to jail. They got a trillion-dollar bailout.”
— Sen. Bernie Sanders (I-Vt.), in a speech in North Charleston, S.C., March 15, 2019
Sanders, who is running for the Democratic presidential nomination, includes a version of this line in his stump speeches — as part of a slew of statements that he says demonstrates how the system is rigged in favor of the rich and powerful.
But his language is a bit slippery and exaggerated. Let’s take a look.
Notice how Sanders says “not one major Wall Street executive” went to jail? That’s because there was actually one Wall Street official who did go to jail: Kareem Serageldin, who was global head of structured credit at Credit Suisse Group and admitted trying to hide hundreds of millions of dollars in losses.
We won’t try to debate whether Serageldin was a “major” executive. Sanders’s larger point is valid: According to the New York Times, almost 900 executives went to jail for the savings and loan scandal in the 1980s, compared with just one person in the 2008 financial crisis. Even the judge who sentenced Serageldin to 30 months in prison was troubled that his conduct was just “a small piece of an overall evil climate within the bank and with many other banks.”
But did Wall Street get a $1 trillion bailout? That’s a nice round number for rhetorical purposes, but it’s not borne out by the facts.
The core of the financial bailout was the Troubled Asset Relief Program (TARP), which Congress passed in 2008 and was run by the Treasury Department. The limit for aid was originally set at $700 billion, but Congress in 2010 reduced it to $475 billion.
ProPublica maintains a great tracker on TARP spending, and it shows that banks and other financial institutions received $245 billion, mostly to replenish capital. But many of those banks are not what one would consider “Wall Street.” Many community banks and credit unions also received TARP funds.
Looking just at the big Wall Street banks, we count $135 billion: Citigroup ($45 billion), Bank of America ($45 billion), JP Morgan Chase ($25 billion), Goldman Sachs ($10 billion) and Morgan Stanley ($10 billion).
But we can take a more expansive definition and say every bank counts as Wall Street. So that’s $245 billion. We can also include the U.S. government takeover of mortgage finance giants Fannie Mae and Freddie Mac ($191 billion), which help keep the housing market functioning. We could also add the U.S. government’s purchase of much of American International Group ($67.8 billion), an insurance company central to many financial transactions, such as credit default swaps.
That adds up to just over $500 billion — or half a trillion.
But this is an expansive definition. The Congressional Budget Office, in a 2015 report, says support for financial institutions added up to $313 billion. So that’s less than one-third of $1 trillion.
TARP, after all, was not just for big banks. The automobile industry received nearly $80 billion. Adding in every possible loan and investment, including to automakers, gets you to about $632 billion, according to ProPublica.
That’s still not $1 trillion.
It’s worth remembering that while financial institutions were bailed out, so were the American people. If these banks and other financial institutions had collapsed, many companies would have soon followed, leading to massive layoffs. The collapse of AIG would have had global impact. Moreover, in the case of Fannie Mae, Freddie Mac and AIG, shareholders were basically wiped out when the government took them over, so it’s not as if the owners of all of the companies that received TARP funds or other government aid were “bailed out.”
Moreover, the U.S. government was eventually repaid for the loans by many of the recipients and ended up earning, as of Feb. 25, a profit of more than $100 billion through dividends, interest and so forth, according to ProPublica.
When we shared these numbers with Arianna Jones, a spokeswoman for the Sanders campaign, she responded: “If anything, Senator Sanders has underestimated the size of the post-crisis bailouts.” She pointed to a number of articles and reports that the Federal Reserve made loans to financial firms totaling anywhere from $7.7 trillion to $29 trillion during the crisis.
The wide range of these estimates suggests that they should be viewed with skepticism. The Federal Reserve at the time said the reports were “wildly inaccurate.” One problem is that the calculations appear to count every loan as a new loan, even if it was simply rolled over to a new period. One of the reports on the Federal Reserve that Jones shared, from the Government Accountability Office in 2011, stated: “Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008.”
The Fed during the crisis created special lending facilities and had the Federal Reserve Bank of New York (FRBNY) extend credit to AIG. The special lending facilities were ended in 2010, and the loans were repaid, with huge profits being generated. “The emergency programs that have closed have not incurred losses and FRBNY does not project any losses on its outstanding loans,” the GAO said.
(Note: The Federal Reserve Board is a federal agency, created by Congress, with principals nominated by each administration and confirmed by the Senate. The Reserve Banks were also created by Congress, serve a public purpose and are supervised by the Board, but are not federal agencies. An earlier version of this article did not make clear the distinction.)
To some extent, there is a definitional issue about what one considers a bailout. The Fed loans were fully collateralized and were permitted under the Federal Reserve Act. The Fed aid was aimed mainly at keeping the financial markets operating.
For instance, the commercial paper market — short-term loans essential to corporations for meeting liabilities such as workers’ payroll — was believed to be basically frozen until the Fed acted. If that’s the case, the entire U.S. economy would have ground to a halt without the Fed’s intervention.
Moreover, the Fed remits its excess profits to the U.S. Treasury, so all of the gains from the New York Fed’s extraordinary facilities were paid to the U.S. government. Our colleague Allan Sloan has estimated that the Fed earned $132 billion in profit from 2007 to 2012 on the special lending facilities, which it, in turn, delivered to the U.S. government.
“As far as Federal Reserve lending is concerned, I do not see how you can call it a bailout when loans were repaid with a profit,” said James D. Hamilton, professor of economics at the University of California at San Diego. He said the cumulative total net gains to the U.S. Treasury from Federal Reserve operations from the first quarter of 2007 through the fourth quarter of 2017 came to $819 billion.
However, economist Dean Baker, in a critique of this fact check, argues that the Fed actions do qualify as a bailout “because these loans were granted at interest rates that were far below the market rate at the time.” He also says that government claims that the commercial paper market froze "was completely dishonest” in an effort to justify tapping TARP funds.
We will note that although the Sanders campaign pointed to these reports of the Fed lending trillions of dollars during the crisis, he does not make such claims in his speech.
Update: Robert Sholars, spokesman for the Special Inspector General for TARP (SIGTARP), points out that “70 bankers sentenced to prison (and many of those were presidents, CEOs and other executives) as a result of our work."
“SIGTARP doesn’t make determinations about whether a particular criminal action led to or contributed to the crisis,” Sholars said. “But take a look at the case studies — a common theme is a bank aggressively expands its loan portfolio leading up to the crisis, then as the loans go bad executives decide to cover up the poor health of the bank to regulators, shareholders and the public.”
The Pinocchio Test
Sanders clearly wants to use a nice round number in his speeches — $1 trillion — when he complains about the leniency shown to Wall Street firms during the financial crisis. But it’s really about one-third to one-half that number, even when you use generous definitions for “Wall Street.”
Whether the Fed efforts should be added to these numbers is a matter of debate. We would not include them — and apparently neither would Sanders. Otherwise, he would be claiming a $30 trillion bailout, not a $1 trillion bailout.
Not only was Wall Street bailed out, but also the whole U.S. economy — at a profit of more than $200 billion for U.S. taxpayers. That point is frequently lost in the political discussion over whether the bailouts were worthwhile. We presume Sanders is not suggesting that the U.S. government should not have taken extraordinary actions to stabilize the financial markets.
Still, a lot depends on how you crunch the numbers and what one includes as part of the bailout of “Wall Street.” Sanders is also right that no major Wall Street official went to jail. (Maybe not so right: See update above.) So we will leave this at Two Pinocchios.
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