The $23.7 Trillion Confusion

Neil Barofsky, special inspector general for the bailout program known as TARP, issued a report earlier this week with a mind-blowing number: $23.7 trillion. It's the amount, according to Barofsky, federal agencies have pledged as potential economic support since 2007.

On cue, some media outlets began squealing:            

  • The Cost of the Financial Bailout: A Cool $23.7 Trillion
  • U.S. Official Sees $23.7 Trillion Rescue Tab
  • Cost of Bailout Hits a Whopping $24 Trillion Dollars
  • Taxpayers Left With the Bill: Total of $24 Trillion

Fox Business News confidently declared Barofsky was "projecting that the bailout will cost you and I and every other taxpaying American out there $23.7 trillion. The scope is hard to imagine."

A few minor details
Yes, it is hard to imagine. And when you find yourself in an unimaginable scenario, there's a good chance you're, in fact, imagining things. Those who interpreted Borofsky's report as meaning taxpayers are on the hook for $23.7 trillion apparently missed his own clarification that "We explained that this doesn't mean the taxpayer is on the hook today for $23.7 trillion."

The sensational fourteen-digit number, you see, is pulled from both illogical assumptions and an incomplete view of the programs. As the New York Times explains:

[$23.7 trillion] includes estimates of the maximum cost of programs that have already been canceled or that never got under way.

It also assumes that every home mortgage backed by Fannie Mae (NYSE: FNM  )  or Freddie Mac (NYSE: FRE  ) goes into default, and all the homes turn out to be worthless. It assumes that every bank in America fails, with not a single asset worth even a penny. And it assumes that all of the assets held by money market mutual funds, including Treasury bills, turn out to be worthless.

It would also require the Treasury itself to default on securities purchased by the Federal Reserve system.

The end of the world as we know it, in other words. Twenty-four trillion isn't the "cost" of anything. It's the sum of previous and potential outlays -- many of which have already been terminated, repaid, or will never implemented -- without any respect to corresponding assets or repayments ... let alone reality.

Assuming the cost could reach $23.7 trillion is no different that saying "Unemployment could hit 100% if everyone loses their job." Or "Google (Nasdaq: GOOG  ) and Microsoft (Nasdaq: MSFT  ) may have gone bankrupt if we stopped using computers years ago." Or even "Elvis might be alive if he wasn't dead." Sensational, yes. Reasonable, no.

Think about it: Could all bank assets -- many of which are backed by real estate and other hard assets -- really become worth zero dollars and zero cents? If every inch of land in America became totally worthless, do you think you'll still be around to care about it? Can you envision a scenario short of nuclear Armageddon where every single bank in America fails? If so, may I offer you a hug?

Don't make it more painful than it already is
No one's trivializing the insanely large amount taxpayers could end up losing. It's both enormous and infuriating. General Motors, Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and AIG (NYSE: AIG  ) still hold vast sums that may never be repaid. And some programs, like mortgage modifications, are guaranteed money-losers that don't even seek repayment.

But when I wrote earlier this week that the "unprecedented flow of information -- a lot of it bogus -- greatly contributed to fear and panic," these types of misrepresentations out of context are exactly what I meant. No one has a clue exactly how much taxpayers are on the hook for -- only that it's a tiny, minute, fraction of $23.7 trillion.

For related Foolishness:                                                                

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Google is a Motley Fool Rule Breakers pick. Microsoft is a Motley Fool Inside Value selection. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2009, at 1:04 PM, mdk5068 wrote:

    Thank you so much for posting this. I can't tell you how infuriating it is to see the majority of re-worded news articles containing the most negative news available. Not only is it not appreciated by all those who are holding savings (that frequent news articles can only drag down), but it kills the confidence of everyone who understands the mentality that "the market reacts to all news instantaneously." Any rational individual would see that 24 trillion is an unreasonable number, so stop re-wording and repeating (even in some cases weeks after the news article was originally posted) negative news that will just bury the economy in a deeper hole than it already is. You cannot help but hurt all of us by reporting consistently negative news, so be smart, do it once, and leave it alone!

  • Report this Comment On July 23, 2009, at 1:37 PM, questioner5000 wrote:

    Funny, but when all is said and done, (and we all know more is often said than done), I think that "the poor taxpayer" will find out that they made a tremendous profit on the BAC "bailout" - - with the TARP Funds repaid, (certanly by the end of 2010), plus the billions in Preferred Stock dividends, ($25BN at 5% and $20BN at 8%), plus the billions they're going to extract from the warrants. They'll also make a ton off of Wells Fargo.

    Yet, they'll lose tons on that financial industry darling, JPM.

    Why? Well, with Bank of America scraping Countrywide and Merrill Lynch off of the taxpayers' agenda, and with Well taking on Wachovia - - both without sticking the government with their acquisitions' lousy loan portfolios, BAC and WFC put themselves in a bind that they are going to need a bit of time to work through. Meanwhile, well-connected Chase gets Bear Stearns and WAMU under very deeply discounted "incentive packages", with the taxpayers getting stuck with the worst of both portfolios/assets.

    At the end of the day, when all gains and losses are added up, BAC and WFC will be taxpayer homeruns, while JPM will be a taxpayer strikeout.

  • Report this Comment On July 23, 2009, at 3:48 PM, mafrickasee wrote:

    Although the $23 trillion number is a shameless play for ratings and selling newspapers, it is good that it grabbed some attention.

    We are in dangerous and uncharted territory at our current rate of spending. Gold hit a new six week high today against the dollar. Our current economic model is moving closer to a 3rd World nation where they print money, sink the currency, and interest rates go through the ceiling. I know, I know, we're not there yet, but no one knows the tipping point of debt that takes us over the edge. Are we $500 billion away? $1 trillion away? $5 trillion away?

    If voters pay more attention to where we waste our money and pressure the folks in Washington to be more discriminating in their spending, then the sensational $23 trillion headline was worth it.

  • Report this Comment On July 23, 2009, at 4:20 PM, TMFKopp wrote:

    Nice work Morgan, somebody's gotta keep those reporters honest!!!

    Matt

  • Report this Comment On July 23, 2009, at 4:34 PM, XMFSinchiruna wrote:

    Misinterpretation comes in all shapes and sizes. :)

    It is indeed unfortunate that media reports confused the figure as representing some measure of ultimate cost. It is certainly no such attempt.

    I myself misinterpreted a news report on the eve of the report's release, and so I mistakenly presumed the figure was a forward-looking estimate of how high the tally could rise rather than an holistic accounting of all announced crisis response initiatives to date. I'm amazed to learn the extent to which I missed the count with my March tally of $13.5 trillion using the same 'maximum outlay' methodology (minus discontinued programs).

    That being said, the quotes cited above from the New York Times are equally misleading. Barofsky made none of the assumptions ascribed to him therein, since he was not offering the figure as an estimate of cost at all, but rather as a measure of scale of the response. The figure makes zero assumptions about the performance of collateral, repayment of loans, etc.

    Additionally, the NYT article in question opens with the exact same type of misinterpretation you cite above: "Just how much could the bailout of the financial system end up costing American taxpayers?"

  • Report this Comment On July 23, 2009, at 6:07 PM, GOLDOIL wrote:

    This extraordinary dollar number is unrealistic, BUT I still have ANOTHER $ 14 Trillion Dollars question that no one is answering to date. I refer to the current outstanding derivatives (mostly CDS) with a $ 400 Trillion Notational Value and the $ 14 Trillion that will require payment, at least in part depending on the worldwide economic and financial recovery. It is equally absurd ro assume that this will simply go away by going to Zero from $ 14 Trillion currently.

    I sure would like to hear some comments on this from our expert and innovative probing readership.

    Sincerely and Good Investing, DAN "VALUEDIV"

  • Report this Comment On July 23, 2009, at 7:59 PM, XMFSinchiruna wrote:

    Goldoil,

    You have correctly identified the beast that lurks within the shadows of mark-to-imagination accounting.

    As the commercial real estate derivatives continue to break down, and the next wave of residential defaults unfolds, again the derivatives beast will pounce upon the financials.

    http://www.fool.com/investing/general/2009/06/01/are-you-rea...

    http://www.fool.com/investing/international/2009/03/24/102-t...

    "Fools may be right to question whether any amount of money will prove sufficient to sate the hunger of this deleveraging beast. According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".

    http://www.fool.com/investing/general/2009/03/24/whos-more-t...

  • Report this Comment On July 23, 2009, at 8:46 PM, jesse2159 wrote:

    There are some debts still left over from the Viet Nam War that have yet to be fully paid nor the total tabulated. But, we do know, is that after 10 years of war, with 58,000 lives lost, the American economy never fully recovered. And this stimulus nightmare with the Iraq war debt and Bush's tax cut for the wealthy, we will be pushed over the brink.

  • Report this Comment On July 24, 2009, at 7:57 AM, SAMSCREEK wrote:

    Frankly jesse2159, I get tired of people bashing Bush for his "tax cuts for the wealthy". If you have made any money in the stock market at all, you have benefited from his tax cuts, rich or poor. If you bothered to look at you tax return last year, you would have seen that you were able to deduct your property taxes with out having to itemize. Also, I didn't have to pay any taxes on the profit I made on a stock I sold, because I fell in the 15% tax bracket.

    I must be rich and didn't know it.

    You can't tell me the crap that Pelosi, Henry and Obama are doing is going to turn out better than what Bush did.

    Bush may not have been the best president we have had, but he isn't the worst. Just look at Jimmy Carter and Lyndon Johnson....case closed.

  • Report this Comment On July 26, 2009, at 7:27 PM, AustinAndy wrote:

    It would not be a stretch to see much more in the way of losses for mortgages in the future. With an unemployment rate at 9.5% and climbing, it is not a stretch to say that up to 10% of all mortgages would be at risk. The amount of money which the taxpayer could end up paying for those "poisonous" assets could easily wind up in the $1.0T range. Until the job market stabilizes, there is a lot of pain still in the pipeline. Not $23.7T. but still a large chunk of change which we do not have to find for assets that go bad.

    The Iraq debt shrinks to a pittance compared to the massive sums that the democrats under Barack Obama has spend and wants to spend in the future.

  • Report this Comment On July 27, 2009, at 12:10 AM, BostonTrader937 wrote:

    Morgan Housel wrote: "No one has a clue exactly how much taxpayers are on the hook for -- only that it's a tiny, minute, fraction of $23.7 trillion".

    Sorry, but President Obama seems to know the total cost of stimulus plan very well.

    Three days ago he said that it will cost in excess of $7 trillion over the next 10 years. This amount will add to Bush’s (actually Bernanke’s) bailout package, $700 billion. Some banks will return their bailout money, thereby reducing the total down from $700 billion. However, the projection of $7 trillion has been compiled on the optimistic basis. “If anything can go wrong, it will” says common wisdom. Actual expense will almost certainly exceed the “optimistic” projection.

    Therefore, we obtain the total of $7 to $7.5 trillion plus $0.5 to $0.6 trillion, that is about $8 trillion. This amount exceeds 33% of the “worst scenario” $23.7 trillion. And 33% (an “optimistic” projection in itself) is anything but “a tiny, minute, fraction”. It is plain arithmetic, sorry. Morgan is wrong on that.

    It would be most realistic to expect that actual cost of stimulus will fall between 33% and 50% of the “worst scenario” $23.7 trillion. This will add on top of existing national debt of around $10 trillion, making the total for the taxpayers of $18 to $22 trillion. This is even less “a tiny, minute, fraction” of $23.7 trillion. All this money will have to be paid by taxpayers. The alternative is national bankruptcy.

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