The Bailout of Big American Banks Has Cost Trillions More Than We've Been Told

George Washington's picture


Granted, the $700 billion dollar TARP bailout was a massive
.  The government said it was doing it to soak up toxic assets, and then
switched to saying it was needed to free up lending. It didn't
do that
either. Indeed, the Fed doesn't
the banks to lend.

True, as I wrote
in March 2009:

The bailout money is just going
to line the pockets of the wealthy, instead of helping to stabilize
the economy or even the companies receiving the bailouts:

  • A
    lot of the bailout money is going to the failing companies' shareholders
  • Indeed,
    a leading progressive economist says
    that the true purpose of the bank rescue plans is "a massive
    redistribution of wealth to the bank shareholders and their top
  • The Treasury Department encouraged banks to use the
    bailout money to buy their competitors, and pushed
    through an amendment to the tax laws
    which rewards mergers in the
    banking industry (this has caused a lot of companies to bite off more
    than they can chew, destabilizing the acquiring companies)

as the New York Times notes,
"Tens of billions of [bailout] dollars have merely passed through
A.I.G. to its derivatives trading partners".


In other
words, through a little game-playing by the Fed, taxpayer money is
going straight into the pockets of investors in AIG's
credit default swaps and is not even really stabilizing AIG.

the TARP bailout is peanuts compared
to the numerous other bailouts the government has given to the giant

And I'm not referring to the $23
in bailouts, loans, guarantees and other known shenanigans
that the special inspector general for the TARP program mentions. I'm
talking about more covert types of bailouts.

Like what?

Guaranteeing a Fat Spread on Interest Rates

as Bloomberg notes:


The trading
profits of the Street is just another way of measuring the subsidy
the Fed is giving to the banks
said Christopher Whalen, managing director of
Torrance, California-based
Risk Analytics. “It’s a transfer from savers to banks.”


trading results, which helped the banks report higher quarterly
profit than analysts estimated even as unemployment stagnated at a
27-year high, came with a big assist from the Federal Reserve. The U.S.
central bank helped lenders by holding short-term borrowing costs
near zero, giving them a chance to profit by carrying even 10-year
government notes that yielded an average of 3.70 percent last quarter.


The gap between short-term interest rates, such as what banks may
pay to borrow in interbank markets or on savings accounts, and
longer-term rates, known as the yield curve, has been at record
levels. The difference between yields on 2- and 10-year Treasuries
yesterday touched 2.71 percentage points, near the all-time high of
2.94 percentage points set Feb. 18.


Blodget explains:

latest quarterly reports from the big Wall Street banks revealed a
startling fact: None of the big four banks had a single day in the
quarter in which they lost money trading.


For the 63 straight
trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan
(JPM), Bank of America (BAC), and Citigroup (C) made money trading for
their own accounts.


Trading, of course, is supposed to be a
risky business: You win some, you lose some. That's how traders
justify their gargantuan bonuses--their jobs are so risky that they
deserve to be paid millions for protecting their firms' precious
capital. (Of course, the only thing that happens if traders fail to
protect that capital is that taxpayers bail out the bank and the
traders are paid huge "retention" bonuses to prevent them from leaving
to trade somewhere else, but that's a different story).


these days, trading isn't risky at all. In fact, it's safer than
walking down the street.




Because the US government
is lending money to the big banks at near-zero interest rates. And the
banks are then turning around and lending that money back to the US
government at 3%-4% interest rates, making 3%+ on the spread. What's
more, the banks are leveraging this trade, borrowing at least $10 for
every $1 of equity capital they have, to increase the size of their
bets. Which means the banks can turn relatively small amounts of
equity into huge profits--by borrowing from the taxpayer and then
lending back to the taxpayer.


government's zero-interest-rate policy, in other words, is the
biggest Wall Street subsidy yet. So far, it has done little to increase
the supply of credit in the real economy. But it has hosed
responsible people who lived within their means and are now earning
next-to-nothing on their savings. It has also allowed the big Wall
Street banks to print money to offset all the dumb bets that brought
the financial system to the brink of collapse two years ago. And it
has fattened Wall Street bonus pools to record levels again.

Abrams chimes

To get a clear picture of what is going
on here, ignore the intermediate steps (borrowing money from the fed,
investing in Treasuries), as they are riskless, and it immediately
becomes clear that this is merely a direct payment from the Fed to the
banking executives...for nothing. No nifty new tech product has been
created. No illness has been treated. No teacher has figured out how
to get a third-grader to understand fractions. No singer's voice has
entertained a packed stadium. No batter has hit a walk-off double. No
"risk"has even been "managed", the current mantra for what big banks do
that is so goddamned important that it is doing "god's work".


has any credit been extended to allow the real value-producers to meet
payroll, to reserve a stadium, to purchase capital equipment, to hire
employees. Nothing.


Congress should put an immediate halt to this
practice. Banks should have to show that the money they are borrowing
from the Fed is to provide credit to businesses, or consumers, or
homeowners. Not a penny should be allowed to be used to purchase
Treasuries. Otherwise, the Fed window should be slammed shut on their
manicured fingers.


And, stiff criminal penalties should be
enacted for those banks that mislead the Fed about the destination of
the money they are borrowing. Bernie Madoff needs company.

is another type of guaranteed spread that allows the giant banks to
make money hand over fist. Specifically, the Fed pays the big banks interest to borrow
money at no interest and then keep money parked at the Fed itself.
(The Fed is intentionally doing this for the express
of preventing too much money from being lent out to Main
Street. That's just dandy.)

The giant banks are receiving
many other covert bailouts and subsidies as well.

Too Big As Subsidy

Initially, the fact that the
giant banks are "too big to fail" encourages
them to take huge, risky gambles
that they would not otherwise
take. If they win, they make big
bucks. If they lose, they know the government will just bail them out.
This is a gambling subsidy.

The very size of the too big to
fails also decreases the ability of the smaller banks to compete. And -
since the government itself helped make the giants even bigger - that
is also a subsidy to the big boys (see this).

The monopoly power given to the big banks (technically an "oligopoly")
is a subsidy in other ways as well. For example, Nobel prize winning
economist Joseph Stiglitz said
in September that giants like Goldman are using their size to
manipulate the market:

"The main problem that Goldman
raises is a question of size: 'too big to fail.' In some markets, they
have a significant fraction of trades. Why is that important? They
trade both on their proprietary desk and on behalf of customers. When
you do that and you have a significant fraction of all trades, you have
a lot of information."

Further, he says, "That raises the
potential of conflicts of interest, problems of front-running, using
that inside information for your proprietary desk. And that's why the
Volcker report came out and said that we need to restrict the kinds of
activity that these large institutions have. If you're going to trade
on behalf of others, if you're going to be a commercial bank, you can't
engage in certain kinds of risk-taking behavior."

giants (especially Goldman Sachs) have also used high-frequency program
trading which not only distorted
the markets
- making up more than 70% of stock trades - but which
also let the program trading giants take a sneak peak at what the real
(aka “human”) traders are buying and selling, and then trade on the
insider information. See this, this,
this, this
and this.
(This is frontrunning,
which is illegal; but it is a lot bigger than garden variety
frontrunning, because the program traders are not only trading based on
inside knowledge of what their own clients are doing, they are also
trading based on knowledge of what all other traders are doing).

also admitted
that its proprietary trading program can "manipulate the markets in
unfair ways". The giant banks have also allegedly used their Counterparty
Risk Management Policy Group
(CRMPG) to exchange secret
information and formulate coordinated mutually beneficial actions, all
with the government's

In addition, the giants receive many
billions in subsidies
by receiving government guarantees that they
are "too big to fail", ensuring that they have to pay lower interest
rates to attract depositors.


The government's failure to rein in
derivatives or break up the giant banks also constitute enormous
subsidies, as it allows the giants to make huge sums by keeping the
true price points of their derivatives secret. See this and this.

Toxic Assets

The PPIP program - which was supposed to reduce the toxic assets held by banks - actually increased them, and just let the banks make a quick buck.

addition, the government suspended mark-to-market valuation of the
toxic assets held by the giant banks, and is allowing the banks to
value the assets at whatever price they desire. This constitutes a huge
giveaway to the big banks.

As one writer notes:

allowing banks to legally disregard mark-to-market accounting rules,
government allows banks to maintain investment grade ratings.

maintaining investment grade ratings, banks attract institutional
funds. That would be the insurance and pension funds money that is
contributed by the citizen.

As institutional money pours in, the stock price is propped up ....

Mortgages and Housing

PhD economists John Hussman and Dean Baker
(and fund manager and financial writer Barry Ritholtz) say that the
only reason the government keeps giving billions to Fannie and Freddie
is that it is really a huge, ongoing, back-door bailout of the big

Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this and this).

Foreign Bailouts

The big banks - such as JP Morgan
- also benefit from foreign bailouts, such as the European bailout, as
they are some of the largest creditors of the bailed out countries, and
the bailouts allow them to get paid in full, instead of having to write
down their foreign losses.

are just a few of the secret bailouts programs the government is giving
to the giant banks. There are many other bailout programs as well. If
these bailouts and subsidies are added up, they amount to many tens -
or perhaps even hundreds - of trillions of dollars.

And then there is the cost of debasing the currency in order to print
money to fund these bailouts. The cost to the American citizen in less
valuable dollars will be truly staggering.

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mrhonkytonk1948's picture

Also highly plausible that the equity markets are being manipulated higher to quiesce the lumpen proles prior to the election season and set the stage for a profitable exit by the Guv from C.

Enkidu's picture


Good work GW. Question: could The Fed sub-contract the paying down of The Debt to the Big Bankers? i.e. give 'em a trillion and let them do The Perfect Trading Quarter (give 'em 10% commission)!!


Bringin It's picture

That raises the potential of conflicts of interest, problems of front-running, using that inside information ..."

So let me guess that Goldman would say something like - We would never blah blah blah

Doesn't the Fed say the same thing?  Doesn't the private bank that is the Fed have this problem in spades?  Oh, never mind that's right ... they would never  blah blah blah


Great work George.

Illya Kuryakin's picture

Damn this really pisses me off.

Bringin It's picture

Illya - I always wondered what happened to you and now you're here on ZH too!  Where's Solo?

RichardENixon's picture

Damn we're getting old. When was that show on, 1965?

Voluntary Exchange's picture

What we must not do is cry U.N.C.L.E. to these pirates.

Turtle49's picture

12:29am local time at Area 51:  Now I lay me down to sleep.  I pray the aliens my leaders (including but not limited to the bankers and elected officials) to take -- and return to any planet other than Earth.  Oh well -- tomorrow is another day and my savings will be robbed again.

Voluntary Exchange's picture

That would violate the "prime directive".   We must solve our own problems.  That's why we are "here" to begin with.  I suggest you get to know your neighbors really well while there is still time to do so.  The times, they are a changing.

Bringin It's picture

There used to be community in America.  Now there's American Idol.

I agree.  It is time to find or create community.

jeff montanye's picture

excellent points all.  the "progressive economist" citing the massive redistribution of wealth to bank stockholders and executives could have added bondholders as well.  at least the stockholders have received some (much deserved) capital losses.  the bondholders have taken nary a haircut and their interest payments have been guaranteed to the penny (contrast with the car companies' version of socialism for capitalists).  

if the msm took half as much time elucidating these points as they do the drug and sex habits of hot young women in the l.a. area, the pitiful political parties we have might just be a tad less sad.  oh, that's right.  that's why it's done.

guidoamm's picture

... and lets us not forget... the MOTHER of all covert bailouts...

By allowing banks to legally disregard mark-to-market accounting rules, government allows banks to maintain investment grade ratings.

By maintaining investment grade ratings, banks attract institutional funds. That would be the insurance and pension funds money that is contributed by the citizen.

As institutional money pours in, the stock price is propped up, the banks are recapitalized AND... drum roll... since bonuses are paid out of total turnover rather than out of net profit.... ta-daa!... big bonuses for the directors...

Anyway! It's all par for the course. In a fiat monetary system, the end of the inflationary cycle must be contrasted by exactly these tools if the state is to survive... so this is not a surprise... 

The more immediate concern is that these policies are inherently exponential in character thus their effect is inherently diminishing... unless the cycle is broken via voluntary debt write-off, the inescapable conclusion of the trend the authorities have chosen, is social upheaval... and as social unrest raises its ugly head the authorities are going to need something to concentrate the mind of the masses away from the plundering occurring at home... historically, global conflicts ensue this sort of juncture...

A bon entendeur, salut!

Steaming_Wookie_Doo's picture

"By maintaining investment grade ratings, banks attract institutional funds. That would be the insurance and pension funds money that is contributed by the citizen."

And that is the real disaster than no one wants to confront. John and Mary Public's pensions are worth shit if they are tied into these fraud bank stocks. Some 70 million people may have to face the fact that they can't retire at all, or face severely diminished standards of living. Further down the lalalalalala I-can't-hear-you hole, the social security check they will be relying on (if they are brave enough to retire) is already too small and will have a serious erosion of purchasing power as this fiat-a-thon printing devalues what few dollars they do receive.

Any bets on suicide-bomber grannies in the next few years?

Sudden Debt's picture

For capitalism to work, there is a need for rich people and poor people.

Rich people keep on being rich :) : CHECK

Poor get more poor : CHECK


Conclusion: Capitalism is working at it's best right now! Let's have a donkey ride on the poor!

You don't hear me complaining :)

Voluntary Exchange's picture

You are misusing the word "capitalism".  We don't have capital, we have debt. There is a huge difference.  When we had true savings with real money instead of debt and  the cursed fiat currency the free market continued to make the middle class bigger and better throughout the 19th and starting the 20th century but then we switched to no capital, debt, fiat currency, fractional reserve, and all the government/big bussiness tricks that we have today.

People ought to:  Study Rothbard; study Ludwig Von Mises; study Thomas Woods; study Hanns-Hermann Hoppe;  Study history. Those who actually think we have "capitalism" have no idea how a free society is supposed to work. They do not understand why a free-unencombered market is always superior to government "regulation" - which power always eventually turns into a means of helping the few at the expense of the many.

Alexandra Hamilton's picture

Capital is not limited to money. Capital means also 'means of production, distribution, exchange and communication'. These are all owned and controlled privately. The private debt that has allowed Capitalists to accumlate all this capital has now conveniently been dumped on the public (i.e. the state). So, it's now their wealth and your (our) debt.

This is called state capitalism, but simple because people can vote. If it were to become any more authoritarian, it would have to be called fascism.

i.knoknot's picture


VE, while you make a lot of (harsh) assumptions about this bloke based on a clearly simplistic post,  using pure statistics alone you are probably 98% likely to be correct, given a random sample of americans (humans?)

without a defined collateral base under a dynamic financial system, the wealth resides with the cleverest liars, who have the police-of-the-day convinced that *they* are the ones to protect.

once the layers unravel, it's the folks with the 'stuff' and/or 'guns' that are left standing until the game resumes in its next form...

an honest financial system, regardless of the layers that may come to wrap it, is composed of auditable/credible promises and appropriate counter-party incentives/punishments.

right now we have neither of those elements, nor the collateral to back any of it.



Voluntary Exchange's picture

Yes, I tried to limit the wording of it to those who ACTUALLY belive we have capitalism, in which case only simplistic counter posts could be understood. (The actual poster might very well be sarcastic about things and quite cleaver).

Another big change I would have made to the American system at it's inception would have been no "limited liability" loopholes. They always eventually become tools for those who choose to live by deception. A properly constructed explicit contract would deal very harshly with fraud and any attempt at deception, and the adjudication/arbitration providers, and security service providers would be part of the explicit contract in a strictly free society.


i.knoknot's picture

i hope you realized i was in full agreement with your post. ++

re: limited liability - agreed also. all legal/judicial systems exist because of the inherent weaknesses of human communication and ever-changing context. consider the average marriage contract. is what you die with what you married? yet it (mostly) works. some come out ahead, some... not-so.

i would hate to stuff that reality into a system of laws, but without the liability you cite, we are guaranteed to fail.

good posts, both.

Strider's picture

You know the dumb part about this hole Emperor's new clothes is that there is some consensus that the market should go up discounting the fact that the only reason the markets were EVER higher than here  was due to bullshit credit default swaps among other devious synthetic realities like Dot coms and Enrons. Why dont I ever see someone addressing that fact that maybe the market has a ceiling and its 1000 ? It has never gone above this without some exotic play with no back bone. The reality is that the market has hit the edge of its reality again and Wall street is at a loss to play the next hand without a manufactured exotic edge while the SEC is looking up its ass under a microscope.

Thats what inning this game is in. Either let them manufacture a new weapon of financial destruction or admit that there is no market above here.

Duuude's picture

Thanks GW. Please forward to John Bogle. I've been wondering where he stands on all this.