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Comment by marcusgarvey | Hacker News Reader

On the fallacy that the U.S. taxpayers made money on the bailouts, note that in finance deals get judged by how much money they make given the risk that had to be assumed to make it. In the case of the bailouts:

$614 billion was disbursed

$667 billion was recouped

For a difference of $53.1 billion, i.e. 8.6%. [1]

8.6% is insultingly low compensation to use taxpayer money that, by the way, could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. FWIW the average junk bond yield in 2009 was above 20% [2].

[1] http://projects.propublica.org/bailout/ [2] http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bond...

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The risk was incredibly low. The banks were rather profitable, but they had cash flow issues from deleveraging. And credit vanished in 2008.

For the government's balance sheet, getting paid back 8.6% is a lot more reliable than your gut instinct of infrastructure or education or (especially!) health care.

If the risk was so low, why couldn't a private entity bail out the banks? Would have been a gangbusters investment, right? 8.6% is a good return for that risk?

How many entities do you know with almost 700bn in the bank ?

The point of the bailout was to throw all the might of the State behind the sector, in a "ye shall not pass" stance that basically stated that either we cut these banks some slack or our current civilization would burn in flames.

It worked, because people got the message and business eventually went back to normal. We can disagree on whether it was "good enough" (I thought the opportunity for deeper changes was ripe, but I'm just an old-school eurosocialist myself), but I don't think any other entity could have done it except Nation-States.

Our current civilization would burn in flames? What a load of poppycock.

> or our current civilization would burn in flames.

Wait a minute, just a minute. The way I see it, the US government didn't disarm a nuclear bomb, it just saved Goldman Sachs (and it's creditors AIG) and let Lehman Brothers die. Smart choice by Henry Paulson, I'd expect no less by a former senior GS manager.

It used tax-payer money and I'd be angry if I were an American. I'm angry at the Greek government who did the same thing (among many other things), but then again. I live in Greece, I get a choice (More than 30 parties run in the elections last time I checked...). In the US I get the feeling that you can vote Democrats or Republicans. Largely disputable policies like this, are never going to change.

At the time, I supported letting Lehman die. Take your medicine, screw-ups!

I was wrong. It's largely regarded as a bone-headed move today. It was the start of the meltdown.

The losses would have to be written off somehow, maybe it could have been done more slowly, but I wouldn't think too much about the trigger for the crisis.

I'm not saying I agree with that line, I'm saying that this is what the (Bush II) government was signaling at the time. (Which for them was likely true -- losing Lehman, Goldman and AIG in a month would have destroyed a world of wealthy executives.)

Greece is another matter; the problem there was not with the bailout, but with stupid terms imposed by the troika to cover debts. In fact, if the troika had behaved with Greece in the same way the US government did with US banks (putting up cash right away, no questions asked), Greece would not have suffered what it did.

> How many entities do you know with almost 700bn in the bank ?

quickly tabs over to lookup Apple's balance sheet

nope. but give it another few years. ;-)

>How many entities do you know with almost 700bn in the bank?

None but no single institution needed that much. Private investors, especially when working together, could have certainly stumped up funds for individual institutions. In fact, in the case of AIG such an overture by Chinese investors was rejected: http://www.nakedcapitalism.com/2014/10/aig-bailout-trial-bom...

That's not "private investors", that's the Chinese government. This would have had clear political implication (the Chinese already hold a lot of US debt etc etc), but regardless, it was Nation-States making moves -- basically the only players in the game, on that size of petty cash.

Warren Buffett, one of the few with the liquidity to invest at that time, did just that.

Many argue and I, for one, agree the the problem was not illiquidity but insolvency [1].

[1] http://www.washingtonsblog.com/2008/10/the-problem-was-never...

If the risk was that low you would have thought that a lot of rich guys would have stood in line to buy up the banks' assets.

Credit crunch. No one was loaning any money to anybody.

> On the fallacy that the U.S. taxpayers made money on the bailouts

> 8.6% is insultingly low compensation to use taxpayer money

So, money was made?

> could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance.

Why couldn't it still be used on infrastructure, education, or healthcare?

Money were made but not enough compared to the risk involved with lending them out. Thats the point.

Bot possibly, even probably, enough compared to the risk involved with not lending them out (i.e. another depression).

Thats irrelevant to how you calculate what the return should be compared to the risk involved.

Why? Loss of tax revenue to the government resulting from a depression is certainly money that the government needs to factor into the calculation.

Sure but so is the danger of going bankrupt for the banks or being completely nationalized.

Also the country would survive a depression if it really came down to that, the bank wouldn't survive a bankruptcy.

So the playing field are fairly even when it comes to having leverage.

Because it's embracing too big to fail. Unless we want 'too big to fail' to be the rule going forward, and unfortunately it seems that it will be, we should reject the idea that the rest of us are the beneficiary of having to bail out the banks.

Whether we embraced it or not, it was part of the calculus. So was the fact that we'd need continued investment into the economy to work our way out of the financial collapse. That meant that options like nationalizing banks, which might drive investment overseas in the future, could have a direct negative economic impact that needed to be considered.

Sure, I agree that we had no choice at that point but to bail the banks out.

But when reviewing the decision afterwards, I think we need to reject lines of argument that the government did really great on the deal so it's not that bad what happened. We don't want it to happen again, we don't want to be in a no-other-options situation.

The total loss in tax revenue over the Great Recession period is measured in trillions.

http://2.bp.blogspot.com/-nkdzCkw8Rr0/U-qiPe1Tf-I/AAAAAAAARS...

I'd suggest that's a much more direct and obvious economic impact than some maybe-perhaps about driving investment overseas. (How, exactly? Do you think money would suddenly stampede out of the US if regulators developed a spine and jailed the delinquent operators who caused the crash?)

Anywway - clearly the decision was political. It was made for the benefit of the banker caste, and not for the general population.

The underlying problem is unearned privilege.

There's no rational reason for these bonuses. But bankers pay themselves these sums because they know they can, irrespective of the incredible damage they cause to the rest of the economy.

You assume there's no other way to avoid a depression. The banks can be bypassed, even if that would be a bit unconventional.

The parent asserted that, but did not actually quantify the risk in any way. I could just as easily say that there was no risk at all since the government was obviously not going to allow those institutions to fail.

The claim that I answered where "Money were made" it didn't quantify it either so I fail to see the point.

One way to infer: what's the risk of lending to a company that's facing an existential crisis, that's in such dire straits that no one else would lend to it?

This ignores the risk of not lending them out, which is difficult to quantify, but is considered significantly greater than 0.

Not sure I understand. The difficulty of lending them out should just increases the risk of lending them out and therefore the need to recoup that risk by a proper margin.

Thats not what happened when the banks regardless of contracts still gave out large bonuses many times more than the return to the taxpayers.

That simply doesn't add up.

The risk of not lending the banks out is a depression where the currency / global economy may have lost more value.

Example: The gov only made 8.5%, but if the US costs have increased 16% over the same period (because of a depression), the overall return is more like 24.5%, ignoring the additional costs of a depression.

"Made."

> So, money was made?

I don't know the details of when the money was disbursed and when the money was recuperated, but if it were disbursed in 2008, and recouped in, say, 2014, there was a 10% rate of inflation, which devalues the currency to the point that no, money was not made.

If 2013, the rate of inflation was 8.2%, which leaves a .4% "profit", assuming no other costs.

If 2012, the rate of inflation was 6.6%, leaving a 2% profit, etc.

Of course, this assumes the money wouldn't have performed in any way just sitting in the government coffers, and I honestly don't know enough to even begin to evaluate whether it would have.

Inflation was 1.5-1.6%.

http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt

edit: computation done by comparing Jan 1 2012 to Jan 1 2013, etc.

Between which dates? If I'm reading this correctly, Jan 08 to Jan 14 is 212 to 234, which is about 10%. (This also matches the statistic that I happen to have memorized of 8% inflation between 2010 and 2014.)

$614billion is almost 30 times NASAs annual budget. We could be on our way to Mars right now.

If the state got its money back, it means that money wasn't paid away in bonuses.

No, the state might have got a better return without bonuses (although I cant remember how the deal was structured). Mind you you could argue that getting a sweet deal like that deserves a bonus...

It is certainly a better deal than the Irish bailout, which will never be paid back and amounted to 100% of GDP.

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