AlterNet: 5 Ways the Government Used Our Money to Save Big Banks and Screw Us

5 Ways the Government Used Our Money to Save BigBanks and Screw Us

By Nomi Prins and Christopher Hayes, The NationPosted on September 26, 2009, Printed on September 26, 2009http://www.alternet.org/story/142910/

As we mark the end of the first year of the financial bailout, the public seems to regard thegovernment's actions with a toxic combination of rage and confusion. People are pissed off buttoo bewildered to know what to do with that anger. The confusion isn't an accident. Thegovernment hasn't exactly been forthcoming about how it's made buckets of money available tothe banking sector. When it does disclose some information--such as in July's SIGTARP reportfrom the Treasury or the Federal Reserve's weekly balance sheet--it's in the form of intimidatingdescriptions, accounting mumbo jumbo and technical reports that do little to illuminate justwhat the hell is going on.What's worse, banks and the establishment press have portrayed TARP as the sum of thebanking industry's federal subsidies. An August 30

New York Times

article, "As Banks Repay Bailout Money, U.S. Sees a Profit," gives the impression thattaxpayers should be happy to have made $4 billion on the deal, as if our checks were in themail. But when the government became Wall Street's bank, it wasn't just $700 billion of TARPmoney that flew north to Wall Street. TARP was but a small fraction (roughly 4 percent) of thefull $17.5 trillion bailout and subsidization of the financial sector. The details of this totalbailout are complicated, but the basic mechanisms aren't beyond the average citizen's grasp.We're going to walk you through it.

Five Easy Pieces: The Tale of Joe and Katie

There are five ways the Treasury, the Fed and other government entities have propped up thebanking sector. In order to understand how each of these works, let's consider how thisassistance might have looked had it been directed at a household, rather than a bank, teeteringon the edge of bankruptcy. The analogy isn't exact, but considering the bailout in this mannerhelps make the whole thing a lot clearer.Imagine a couple living in a three-bedroom house outside the Twin Cities. Call them Joe andKatie Hazzard. The Hazzards own a small off-track-betting (OTB) business and have someinvestments and a mortgage on their house. But business is terrible (no one has extra money to

AlterNet: 5 Ways the Government Used Our Money to Save Big Banks and Screw Us

make bets); Katie recently lost her job; their investments have hemorrhaged value; and theycan't make their mortgage, car or credit card payments. So they ask their local bank for a loan."No dice," says the bank. "We can't give you money to pay your debts because you're no longera good credit risk for us." That's more or less what happened to the banks last fall: they couldn'tand wouldn't lend to one another.

Capital Injections and Direct Loans

So the Hazzards go to the Federal Bailout Bank, which says, "Here's some money. Do with itwhat you want, and someday down the road, if and when you're out of the woods, you'll have topay us back with a little bit of interest." That's roughly what the $700 billion TARP was: adirect injection of capital to purchase preferred shares, which is really more like extending aloan than making the investment the government said it was, with some very light stringsattached.But then Joe says that the handout isn't enough. It turns out that not only does he own agambling business; he has a bit of a gambling habit. Joe made big money in previous yearsbetting on the New England Patriots to win the Super Bowl and figured he couldn't go wrongplacing the same wager again. But then Tom Brady injured his knee last year, and Joe gotcreamed. Inveterate gambler that he is, he's doubled down on the Patriots this year, but he won'tbe paid off (if, that is, the Patriots win) until later in the year. But Joe has a boatload of outstanding gambling debts he needs to pay now.So the Federal Bailout Bank decides it'll help out. To cover the truly pressing debts (the bookieis about to send over some goons with baseball bats), the bank will just write a check. That'swhat the Fed did to back the losses of AIG's credit default swaps and other businesses, and whatthe Fed and Treasury did together by providing protection to Citigroup in the event that more of its toxic assets lost value. The money--$1.4 trillion--was structured as a loan, but it's a bitunclear how it will ever be paid back.In addition to his bets on the Patriots, it turns out, Joe's been making bets on just about anything,the outcomes of which have yet to be determined. The Hazzards are scared that a lot of thesebets don't look too promising (e.g., Joe's wager that Kanye West will win this year's NobelPeace Prize). What they want is to unload their positions in those bets, to have some othergambler pay them the original sum they put down and take on the risk. If the bet makes good,the new gambler would get the rewards. If it doesn't, he would take the loss. But they can't findanyone to do that because so many of Joe's wagers were so reckless.Once again, the Bailout Bank steps in to sweeten the deal, telling would-be gamblers it will putin $6 for every $1 they put up. That means Joe's Kanye West bet for $100 (at very long odds)can now be purchased by a fellow gambler for just $14.28. If Kanye does, in fact, win theNobel, then this lucky gambler will get paid as if he had put up the whole $100. If not, he's onlyout fourteen bucks. That's the crux of Tim Geithner's $1 trillion Public-Private Investment Fund,

AlterNet: 5 Ways the Government Used Our Money to Save Big Banks and Screw Us

which would bring the full amount of capital injections and direct loans to $2.4 trillion.

Indirect Loans and Guarantees

The Hazzards come back and claim that wasn't enough; they're still screwed. So the bank says,"We can give you some more short-term, thirty-day loans to get you through (even longer-termones if that doesn't work), but you have to post collateral. It doesn't have to be very valuable:your old bicycles in the garage, your basement sofa-bed, maybe that baseball card collectionyou planned to use to pay for your kids' college educations. And if you still need more at theend of the thirty days, you can post some more junk from your attic as collateral."This more or less corresponds to the newly established Federal Reserve facilities (think: creditunions for banks), which provide money to banks in exchange for various assets as collateral.Both the Federal Reserve and the Federal Reserve Bank of New York administer thesefacilities. They run the gamut from the $1.8 trillion Commercial Paper Funding Facility, createdto provide more credit for households and businesses (which, to be fair, did help calm themarkets; but it didn't get to households or to most small businesses), to the $540 billion MoneyMarket Investor Funding Facility, created to back private funds owned by banks, insurancecompanies or investment advisory companies.Joe comes back again to Bailout Bank and says that he's still short, but he has a proposal. "I'mnot going to ask you for any more loans. Promise. Instead, I'm going to see if someone else willlend me money. The problem is, I'm such a terrible credit risk I need someone to back me up.Maybe instead of me asking for a loan, I could kind of use your name to ask?" That's the rolethe FDIC played for Goldman Sachs and other firms, which took advantage of $940 billion inFDIC guarantees to raise cheap money for themselves and another $684 billion of backing fortheir trading accounts as an additional perk.All in all, these kinds of guarantees, along with the indirect collateral loans for the bankingindustry, total $6.7 trillion, and there is precious little transparency coming from the Fedregarding most of it. In fact, Ben Bernanke told Congress in November that too muchtransparency about which banks got which loans and for what collateral would be"counterproductive."

General Backing and Subsidization

Bailout Bank isn't done helping the Hazzards. It turns out that the couple also has a vacationcondo that's lost some value. As part of propping up their balance sheet, the Bailout Bank promises to guarantee the price of the condo. In other words, if Joe and Katie are forced to sellthe condo for less than its value before the housing crisis, the Bailout Bank will write them a