The Death of Bailouts?

The Troubled Asset Relief Program -- aka "the bank bailout program" -- is scheduled to expire Sunday.

This was, you will recall, the $700 billion "bazooka" President George W. Bush's Secretary of Treasury Henry Paulson requested in 2008 to stop the financial panic once and for all.

With the program now expiring, you can expect to hear pundits and politicians rushing to pass judgment. To save everyone some time: Yes, it was necessary; yes, it should have been more transparent and less generous to Wall Street; and yes, it should have been tied to tougher financial reforms like the Volcker Rule and breaking up "too big to fail" banks so that this never happens again.

While the "mother of all mother of all bailouts" probably saved us all from total economic ruin, critics of the program include ... well, just about everyone.

But our national fixation on TARP misses the bigger picture.

The bigger picture
The Center for Media and Democracy, a nonpartisan media and consumer watchdog that publishes SourceWatch.org and provides a monthly updated bailout tracker, gave me an exclusive sneak peek at its new report.

These folks have done some of the best work out there digging through all the data to tabulate a complete picture of bailout costs. Here's the upshot from their new study:

This graph represents all the money that has gone out the door or was created on the Federal Reserve's balance sheet.

TARP, which invested hundreds of billions of dollars in everyone from community banks, to Goldman Sachs (NYSE: GS  ) , to traditional banks like US Bancorp (NYSE: USB  ) , to GMAC and American Express, was just a drop in the bucket. The bulk of bailout funds took the form of lending to banks and buying up bank assets:

Bailout Program

Disbursed Funds (in billions)

Things It Did

Bank liquidity loans

 $1,847

Loaned emergency funds to banks in exchange for collateral

Fed mortgage-backed securities

 $1,128

Bought mortgage-backed securities

Foreign central bank

 $683

Lent dollars to foreign central banks in exchange for collateral

Fannie & Freddie

 $537

Lent money, bought assets

TARP

 $307

Invested capital in hundreds of financials and provided additional capital for AIG (NYSE: AIG  ) , Citigroup (NYSE: C  ) , and Bank of America (NYSE: BAC  )

Toxic assets

 $153

Bought toxic assets from AIG and from Bear Stearns to facilitate JPMorgan Chase's (NYSE: JPM  ) acquisition

Now, before your head explodes, realize that most of this money has already been returned. Here's what's ongoing:

At $1.1 trillion, the big item here is the Federal Reserve's mortgage-backed security purchases. The program was an attempt to kill four birds with one stone. It 1) helped to stabilize the housing market, 2) restored liquidity during a liquidity panic that threatened to take down everyone relying too heavily on the overnight lending market from Wall Street to General Electric (NYSE: GE  ) , 3) cleaned up bank balance sheets when bad investments were blowing up left and right, and 4) is a means of keeping long-term interest rates down (and credit cheap) when the Fed can't lower short-term rates any further.

The Fed halted its purchases on March 31. (This, of course, prompted civic-minded Fools to launch Motley Fool Mortgage Management, our April Fool's Day foray into the exciting world of leverage and high finance.)

The Fed probably won't sell these assets in a hurry -- doing so could hurt our nascent recovery by driving up interest rates. Also, there aren't many corporate buyers left standing with $1.1 trillion-deep pockets. We can expect the Fed to hold these securities for years, perhaps even to maturity.

An ounce of prevention
Despite drawing all the headlines, TARP pales in comparison to total disbursed bailout funds. While most of this money will ultimately be recovered, it probably won't all be. And bailouts pale in comparison to the full economic and human cost of the financial crisis and ensuing recession.

The recently passed financial legislation bans many of these kinds of bailouts from occurring in the future. Instead, it requires large financial institutions to explain how they could be shut down in an orderly fashion; if the plans aren't credible, they can be forced to hold more capital or stop certain activities. Should a massive financial institution go under, the Federal Deposit Insurance Corp. would liquidate the company.

Will it all work? Only time will tell -- it's a good idea, but I'm skeptical that it would be possible to wind down any of our largest financial institutions in an orderly fashion unless they undergo significant makeovers. If regulators aren't tough, there will be another crisis, and a future Congress will be faced with the choice between bailout and economic collapse.

The real lesson bailouts teach is that it's far better to take precautions against a financial collapse than to expect to navigate smoothly through one. The financial crisis was a mess we don't want to face again for a long time.

If you'd like me to keep you posted on issues related to financial reform and investor advocacy, shoot a blank email to imoscovitz@fool.com

Ilan Moscovitz owns shares of US Bancorp. American Express is a Motley Fool Inside Value pick. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (28)

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 September 30, 2010, at 6:07 PM, sirbeaky wrote:

    Any chance those nice plots could be re-posted as higher-quality? (might also recommend .png compression).

  • Report this Comment On October 01, 2010, at 1:27 AM, goalie37 wrote:

    Listed in this article - Goldman Sachs, US Bancorp, American Express, AIG, Citigroup, Bank of America, JPMorgan Chase, and General Electric. Whew. Good to see they all got money. You guys all got your checks too, right?

  • Report this Comment On October 01, 2010, at 6:27 AM, JacksonInVA wrote:

    Absolutely excellent article. The best I have seen anywhere. I have a few suggestions though. First I agree, use .png graphics. Second, I would like to encourage The Fool to give us an idea of the size of some of these big numbers. How do these compare to the budge of the DOD or SS or something that the Fool might use as a standard comparison in the future.

    Speaking of future, In the article IIan stated,

    "I'm skeptical that it would be possible to wind down any of our largest financial institutions in an orderly fashion unless they undergo significant makeovers. The real lesson bailouts teach is that it's far better to take precautions against a financial collapse than to expect to navigate smoothly through one."

    I encourage you to write future articles on events in the banking industry and government oversight that speak to these statements. Also, in the end, the banking industry fooled the brave and free people of the United States as well as good people around the world. What actions as individuals can we take with our money to reduce the size of these monster banks?

  • Report this Comment On October 01, 2010, at 7:53 AM, nunnatheabovetwo wrote:

    Nice article. Enjoyed it!

    There is no replacement for good ethics and self-discipline. Those are the things society use to value.

    Greed took the place of ethics and self-discipline. It also took the place of one's education. ie You don't give loans to anyone who can't pay back the loan. This is/was the minset of everyone from senators to CEO's.

    So now that there is fewer ethical CEO's and congressmen etc., we lack self-discipline and our education means nothing to us. We must have laws.

    Laws are made for the lawless.

    A novice fool.

  • Report this Comment On October 01, 2010, at 8:33 AM, sptfool wrote:

    Would love a facebook button to share with other fools

  • Report this Comment On October 01, 2010, at 9:24 AM, XMFSinchiruna wrote:

    Excellent article, Ilan. Bravo!

  • Report this Comment On October 01, 2010, at 10:35 AM, Keal7 wrote:

    "Yes, it was necessary; yes, it should have been more transparent and less generous to Wall Street; and yes, it should have been tied to tougher financial reforms"

    Ilan, could you comment on how far towards more transperancy, less generosity, and how much tougher the financial reforms since the new admin came in. For instance, did the tightening of pay in insitutions on TARP help expedite pay backs. Also you stated:

    "The recently passed financial legislation bans many of these kinds of bailouts from occurring in the future. Instead, it requires large financial institutions ..."

    That is a weird construction. Instead suggests something wasnt done which is not what the first sentence states. Are you trying to be pleasant to both sides of those who viciously hate everything about the current admin and those who bliindly love them? If they did a little well somewhere is it the case that to preserve one's credibility in our angry evironment, it is expedient to tenderly try to state it or state both sides in a confusing paragraph?

  • Report this Comment On October 01, 2010, at 11:12 AM, zooman53 wrote:

    Bravo! Finally some information and comment based on facts and figures and not just emotion. Although the public didn't love this program and it smacks of giving out money to the "big boys", people need to be educated about the necessity of this program to get our economy back on track.

  • Report this Comment On October 02, 2010, at 8:10 PM, lowmaple wrote:

    doesn,t matter if bailouts aren,t TARP. They are still bailouts and some were riduculous

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