Corporate Media Didnt Care about the Deficit When U.S. was Bailing Banks

Posted on Wednesday, 24th August 2011 @ 03:47 AM by Text Size A | A | A

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The Big Banks Have Not “Paid Back” Government Bailouts and Subsidies


The big banks claim that they have paid back all of the
bailout money they received, and that the taxpayers have actually made
money on the bailouts.

However, as Barry Ritholtz notes:


Pro Publica has
been maintaining a list of bailout recipients, updating the amount lent
versus what was repaid.

So far,  938 Recipients have had
$607,822,512,238 dollars committed  to them, with $553,918,968,267
disbursed. Of that $554b disbursed, less  than half — $220,782,546,084 —
has been returned.

Whenever you hear pronunciations of how much
money the TARP is  making, check back and look at this list. It shows
the TARP is deeply  underwater.


Moreover, as I
pointed out
in May, the big banks have received enormous windfall
profits from guaranteed spreads on interest rates:



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 Institutional Risk Analytics.
“It’s a transfer from  savers to banks.”The  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.

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”.

Nor 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.

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.

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.

There 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

The newly-released
Fed data
shows that the Fed also threw money at many of the big
banks at ridiculously
interest rates.

And as I also pointed
, the government gave tax subsidies to the too big to fails:

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).

the Wall Street Journal noted
this week:

A series of tax relief measures is
saving companies bailed out by the  government billions of dollars at a
time when concern over tax revenues  has risen.

Although the
Treasury Department first provided the tax guidance in  the fall of
2008, the magnitude of the tax savings has become clearer in  the past
year ….

“The agencies are literally throwing gratuities at
banks and other  companies,” said Christopher Whalen, a bank stock
analyst at  Institutional Risk Analytics.

And as I’ve
previously reported:

Too Big As Subsidy

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)


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).

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.


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.


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.

In  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

economists John
   and Dean
  (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  banks.

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

Foreign Bailouts

big banks –  such as JP
  – 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.


all of the different bailouts and subsidies given to the big banks are
added up, it is obvious that they have not come anywhere close to
“paying back” what we gave to them.



Most informative, thanks.A decade ago or so I and many others
would have asked how can a government (two different governments!) be so
corrupt and yet persist in a democracy? Today however it seems to be

If this massive organized ripoff would have
happened in the 1970s, the USSR would have “won” the Cold War. It may
still win posthumously.

December 5, 2010 8:21 PM


Voices Bahamian
You crazy Americans thought they did?   Das funny.  I weak.  Got to know
how the system works to not get screwed by it.  Takes a lot of guts to
do that.

December 5, 2010 8:47 PM


Greg Bacon
The rate of interest I’m getting on my savings account DROPPED again
this month from 0.07% to 0.05%.  If this keeps up, soon I’ll be paying
the bank charges just for the privilege of parking my money in their
safe.Think I’m going to buy some more ammo, this daylight
robbery has to stop before we’re fighting over dumpster scraps.

December 6, 2010 1:05 AM


It’s not the extent of the fraud.  It’s the impact of it.  It’s like
throwing gasoline on an already raging inferno.”G.E. and
JPMorgan Got Lots of Fed Help in ’08″

Immelt’s GE needed more than 16 billion dollars.

Virtually every
large company in the country is bankrupt right now, not just the banks.
They were all playing the Derivatives Roulette Wheel.

what the invention of derivatives game is.  It’s a Roulette Wheel.

-on the Derivatives Roulette Wheel- the players don’t win the big
jackpot for having the ball land on their number.  They win the smaller
jackpots every time the ball misses their number.

It’s a game too
good to be true.

Suddenly, there are more and more balls rolling
around the Derivatives Roulette Wheel.  They call them Black Swans, but
that’s a shirking response to stupidity.

Everyone is
increasingly taking the-big-jackpot-loss when the loser-ball lands on
their number.

These companies that bought derivatives-numbers own
those derivatives numbers, -forever- -or until they themselves become
another losing-number rolling around on the Derivatives Roulette Wheel.

the invention of the Derivatives Roulette Wheel came along, no one
asked the critical question, which is, WHERE IS THERE REALLY ANY

The answer to that question is
obviously, there is none.  And all the profits were just theft.

is not a question of printing up enough money to tide these companies
over the bad times.

Neither borrowing money nor printing money up
will solve the problem that has been brought about by the collapse.

faux-solutions will only accelerate this collapse.  That is obvious.

collapse is indeed accelerating.

Go outside.  Look around.  Is
the sun shining anywhere?

No.  Trillions were spent, tossed from a
helicopter.  And the problem has gotten proportionally worse,
proportional to the amount of money borrowed and printed up.

Bernanke and Princeton have turned out to be just as wrong as were the
inventors of the Derivatives Roulette Wheel.

And the same
question must be asked of Bernanke’s helicopter-response.


The answer is
exactly the same.  There is none.

December 6, 2010 5:37 AM


Zeus Yiamouyiannis, Ph.D.
Once again, Washington’s Blog, one of the best researched, most
comprehensive blogs on the internet gets is right.  Thanks for your
service and strong, reasonable, progressive perspectives.  Citizen Zeus

December 6, 2010 5:58 AM


You’re severely misinformed.  Not all of the TARP funds were done as
loans – a bit less than half, actually. The rest was taken as equity –
preferred stock. That’s why the money paid back is far less than the
total amount, because we’re making the rest back by selling off the
stock. We’re about to sell a big chunk of Citibank stock, for example.

December 8, 2010 2:13 PM

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