A deck chair on the Titanic

by Russ Roberts on August 31, 2009

in Financial Markets

In an incredibly misleading story that is making the rounds, the  New York Times reports:

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

I like the word “begun”—as if this is just the beginning—a trickle of profit that could eventually become a torrent.

But this “news” is totally irrelevant:

The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

These are the “profits” the government is making off the banks that it forced money on, banks that were solvent but that were forced to take government funds in the name of making sure that no one could identify the bad banks.

The reporter, Zachary Kouwe, does recognize that these “profits” are not the whole story:

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

What the story does not mention is the magnitudes. Profits of $4 billion? The government has already sent AIG a reported $180 billion. The government has sent Fannie and Freddie roughly $95 billion. The Fed is sitting on at least $600 billion of mortgage-backed securities it purchased from Fannie and Freddie. And the news story is $4 billion in profit? That’s a deck chair on the Titanic.

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E. Barandiaran August 31, 2009 at 5:34 pm

Let me copy a comment that I made earlier today on Arnold Kling’s post on the same news:

Arnold, information about government programs to help banks and other financial institutions is still incomplete. To determine whether the programs were to solve a liquidity problem or to bailout insolvent institutions you need to know the impact of ALL the programs on each of the 10 or 20 largest institutions as well as on the Fed, the Treasury, FDIC and any other government agency that has disbursed funds.
This is work for the next five years. Unfortunately politicians and bureaucrats will release partial information from time to time to give the impression that the government has earned money from its intervention. And unfortunately you will see many economists that will go along with this practice.

Anonymous August 31, 2009 at 5:41 pm

But your $180 billion is not the right magnitude to compare to the $4 billion in profit. Yes, there were only $4 billion in profit – but the point is all the other obligations were repaid as well. Do you expect all $180 billion sent to AIG to be lost? Yes, these gross flows dwarf the profits, but if you’re going to mention the $180 billion to AIG, the $95 billion to the GSEs, or the $600 billion in the Fed, the relevant comparision for these is how many billions were sent to banks that have been repaid.The relevant comparison for the $4 billion in profits is whatever portion of the total we lose from our dealings with AIG and the GSEs.$4 billion may still be deck chairs – but not as sensationally so as when you mention the gross amounts on the AIG/GSE side of the ledger and the net amounts on the eight other banks. Right? Or am I thinking of this the wrong way.

Methinks August 31, 2009 at 10:18 pm

The portion we will lose from AIG and and the GSEs is 100%. The AIG bailout was just a way to pass money from the fed to institutions it has no legal authority to bail out any other way. That money is gone. In fact, part of the money that Government Sachs used to repay its own TARP was the TARP money it got from being a counterparty to AIG. AIG is bankrupt. Kind of funny if you think about it.

The GSE’s won’t be able to pay it back either if for no other reason than their government overlords ordered them to make MORE of the same kind of loans that got them into trouble in the first place. They’re bankrupt.

Also, the government won’t collect $4 Billion in taxes. It will collect some portion of those profits in taxes.

So, basically, you’re saying that a few billion dollars collected in taxes from the financial industry compared to the HUNDREDS of billions poured into is NOT a sensational difference. That’s just hilarious.

Anonymous September 1, 2009 at 9:49 am

No, I’m saying that even if AIG does go bankrupt, I’m not sure why you’re under the impression that means we won’t get anything back. We’re likely to get back quite a bit. (http://www.economist.com/businessfinance/displaystory.cfm?story_id=14214879)

The case with Fannie and Freddie is obviously much more dicey right now.

I also don’t see what you don’t understand when I write “$4 billion may still be deck chairs”. I recognized we may still take a loss.

Methinks September 1, 2009 at 2:51 pm

AIG is already bankrupt.

Danny, for somebody who resents condescending remarks from others, they sure pour out of you like an overflowing sewer.

I completely understand your usual nit-picky remark. Your mind isn’t that complex.

If your reading comprehension skills were a little sharper, you would notice grasp that I think it’s hilarious you think the difference between taxable profits and what we’ve poured down the drain isn’t sensational.

But then, I’m not surprised. Your raison d’etre is to pick apart everything the professors say and issue totally irrelevant (and often untrue) proclamations.

Methinks September 1, 2009 at 2:51 pm

close tag.

Anonymous September 1, 2009 at 2:56 pm

Somebody who can’t tell the difference between “isn’t sensational” and “isn’t as sensational” shouldn’t go around on their high horse denouncing other people’s reading comprehension skills.

I’m trying to point out that I fundamentally agree with you and that I’m not trying to say everything is rosy. It’s like you’re allergic to the prospect of having some common ground with me.

Now – some of what I just wrote in this comment could be interpreted as “condescending remarks”, but I’d be interested in hearing what you thought was so condescending about what I wrote immediately prior to this comment of yours.

Anonymous September 1, 2009 at 11:17 am

It’s also worth considering the billions in potential losses to the taxpayer if AIG went down. The counterfactuals get hard to assess with any accuracy, but that doesn’t make them less meaningful. It’s just important to keep in mind that they didn’t provide this capital just for the hell of it.

David August 31, 2009 at 11:48 pm

I have no idea how you defend the headline of this story “As Banks Repay Bailout Money, U.S. Sees a Profit”. It does not qualify that statement in any way. None. We are nowhere near showing a profit on TARP and all the other bailouts. To say that because a few of the institutions that didn’t need the money in the first place paid back the money they were forced to take, with interest, we are profiting is incredibly misleading and, frankly, irresponsible.

Sam Grove August 31, 2009 at 7:05 pm

If they repaid with money the FED created, then consumers will end up paying for it via inflation.

Anonymous August 31, 2009 at 7:10 pm

If they repay it there will be a contraction in the money supply.

Sam Grove August 31, 2009 at 8:01 pm

That depends on what is done with the money.

The FED is not know for contracting the money supply, not since the Great Depression.

Usually it is hoped that economic growth, particularly increased productivity, will compensate for the increased supply of money.

Anonymous August 31, 2009 at 8:15 pm

Well yes, they could always lend it back out – but holding everything else equal moving funds from the banks’ balance sheets to the Fed’s balance sheets will reduce the money supply. That doesn’t mean that on net the money supply is reduced. But repaying the loans in and of itself is contractionary.

Don Lloyd August 31, 2009 at 8:48 pm

When the government forces money on a bank and then extorts the bank with all sorts of threats including compensation regulations, profits is the wrong word. The money returned is a form of organized crime protection premium.

Regards, Don

Ike Pigott August 31, 2009 at 9:26 pm

As long as it saved or created at least 8-million jobs.

Anonymous August 31, 2009 at 10:14 pm

Reminds me of people who “win” at the casino;”I won $1500 just last week!”.
How much did you lose the week before?
And the week before that?
And last month?……

Matt August 31, 2009 at 10:35 pm

The only concern seems to be with monetary loss, but something in the back of my head makes me think we could have lost something more important. We may have lost the ability to read a monumental market signal about the way “big banks” should be set up and how the country as a whole manages risk or maybe something else. With so much worry about the indebtedness of Americans, did we just hit the snooze button on our wake-up call?

Perry Eidelbus September 1, 2009 at 1:00 am

And other “great news” is that the Federal Reserve made $29 billion in profit in the last two years: $14 billion profit from loans, and “about $19 billion from interest and fees charged to institutions that tapped liquidity facilities during the global financial crisis.”

But from where does the Federal Reserve get money? In this crowd, I suppose I shouldn’t need to point out that their profits come from nothing, while we all pay via inflation. The medieval alchemists seeking the Philosopher’s Stone could not have done better.

Anonymous September 1, 2009 at 7:59 am

I doubt that Goldman Sachs was solvent at the time they needed those 25Billion dollar or so AIG (Tarp) funds.

Methinks September 2, 2009 at 2:49 am

Who knows, but of all the I-banks, Goldman was most likely to have actually been solvent. Goldman made more money on its hedge to its AIG exposure than it received in TARP funds as part of the AIG bailout. Even if it wasn’t solvent, that doesn’t change the fact that a lot of solvent banks were forced to take TARP and then paid it back.

I think it’ll be pretty hard to decipher what was really solvent and what wasn’t since the government launched a massive asset price manipulation program during the turmoil.

piefarmer September 1, 2009 at 2:11 pm

Bigger danger is what Russ highlighted back when the bailouts were being debated. If the government can force money on corporations and then show a profit (real or not, meaningful or not) it will only embolden them to take such action more frequently.

Tim September 1, 2009 at 5:45 pm

Obama has the same accountants working on this analysis that he has working on his budget. They are affirmative action employees.

Vandecourtr September 2, 2009 at 12:54 am

All this talk about budget deficits is small potatoes. What we need to concern ourselves with is Obama’s giving our country to Communist and Radical extremists. This is well on the way. In less than a year we will no longer recognize our country. It will look like the USSR did in the days before the fall of the Berlin Wall. Think I’m kidding or don’t know what I’m talking about go to http://www/glennbeck.com and look through the site thoroughly and then make your judgment. If the hair doesn’t stand up on the back of your neck, then you have no pulse. We do not have much longer if we do not get the current regime out, and I am not talking about democraps or repukelicans. Both are equally guilty. Kick the bums out or die.

Name September 3, 2009 at 9:17 pm

The government has not sent AIG $180 billion, that is the credit available to AIG. The amount AIG has taken is closed to $80 billion, per WSJ. (Your comparison would be like saying I owe the credit limit on my credit card, not the amount I have charged to the card.)

Methinks September 2, 2009 at 2:40 am

Oh, of course you’re right, Danny! Why a few billion dollars recouped from AIG in the context of hundreds of billions poured into (and never to be seen again) AIG and Fannie and Freddie and Citi and….the list just goes on… IS a LOT less sensational than what Russ Roberts was implying. Silly me!

Danny, you think you agree with a lot of people when, in fact, you don’t. They tell you that they don’t agree with you and you pout that you’re misunderstood. There have been rare occassions when we find common ground, but I don’t agree that a few billion dollars less of losses in the context of hundreds of billions lost is enough to claim it’s not “as sensational” unless you’re just trying to show off and failing badly. When that happens, I feel compelled to come riding in on my high horse.

Unlike you, I have no interest in becoming the Miss Manners of the comment section at Cafe Hayek. I’m not your mother. You’re a big boy and if you can’t figure out what combination of golden words that tumble from your fingers form condescending remarks, then maybe you’re not as well reared as you once thought and you should take that up with your parents. I just made an observation.

BTW, you were so caught up in whether or not I am allergic to you that you missed my biggest error. I misread the post as bank profits instead of the “profits” the government made by bailing out banks that didn’t need bailing out.

Anonymous September 2, 2009 at 10:12 am

“Unlike you, I have no interest in becoming the Miss Manners of the comment section at Cafe Hayek. I’m not your mother.”

See now this is interesting. You’re deep and abiding interest in telling people how out of line they are would suggest you do take to the miss manners role quite easily. I asked how I was being condescending simply because the accusation was so confusing to me. No golden words – just a few thoughts. I’ll leave the hubris to others.

Others, for example, who think they can tell the future. On what basis do you say we’ll only get a “few billion” back? My understanding is that CBO and Congressional Republicans alike (and when those two agree…) are expecting tens of billions back from AIG. Others have hopes for Fannie and Freddie too eventually: http://business.theatlantic.com/2009/09/could_the_economic_bailout_turn_a_profit.php

And Fannie and Freddie are still making regular payments to the government.

All I’m saying is that in light of all this – and in light of the extreme uncertainty that may indeed still leave us soaked, why don’t we make the right comparisons rather than making a comparison that implicitly assumes doomsday. Leave it to you to make an issue over what I thought was a pretty simple thought in light of uncertainty about the future.

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