$10.2 Trillion? A Mere Drop in the Bucket

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As we approach the annual Easter Egg Roll on the White House lawn, Fools are reminded that conventional wisdom warns against placing all one's eggs in one basket.

With a collective response that crams trillions of eggs into one hastily woven basket, the largest bets in history are being placed upon the roulette wheel of global financial markets. The adopted strategy of spending our way out of this mess by propping up the system with loans and guarantees has now been etched into stone ... there is no turning back. To the contrary, I fear the only path ahead implies still further commitments of public funds and woeful undermining of the U.S. dollar.

Sustaining a rally even in the face of quantitative easing and new fiscal interventions to battle the toxic asset menace, investors seem comfortable with the bets even as the stakes rise sharply. Come on, lucky seven! Although I continue to hope for the best, I am increasingly skeptical that the odds are in our favor.

The 684-trillion-pound gorilla in the room
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".

Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do.

The following table provides as precise an accounting of the crisis as the public record presently permits. By my calculations, the combined total of existing, announced, and potential outlays from the Federal Reserve and U.S. government agencies that are directly attributable to the financial crisis will breach $13 trillion!


Issuer / Guarantor

Amount of Outlay or Guarantee

Commercial Paper Funding Facility

Federal Reserve

$1,800 billion

Fannie Mae (NYSE: FNM  ) , Freddie Mac (NYSE: FRE  ) , and Ginnie Mae

U.S. Treasury / Federal Reserve

$1,650 billion

Temporary Liquidity Guarantee Program


$1,400 billion

Geithner's Legacy Loans Program


$1,000 billion

Term Asset-Backed Securities Loan Facility (TALF)

Federal Reserve / U.S. Treasury

$1,000 billion

Term Auction Facility (TAF)

Federal Reserve

$900 billion

Obama Stimulus Plan

U.S. Treasury

$787 billion

Earmarked within 2010 budget proposal for additional bailout

U.S. Treasury

$750 billion

Treasury Asset Relief Program (TARP)

U.S. Treasury

$700 billion

Total USD international currency swap lines

Federal Reserve

$688 billion

Money Market Investor Funding Facility

Federal Reserve

$540 billion

Line of credit to FDIC supported by Bair, Geithner, and Bernanke

U.S. Treasury

$500 billion

Citigroup (NYSE: C  ) Guarantee

U.S. Treasury / FDIC

$306 billion

Hope for Homeowners Act of 2008

U.S. Treasury

$304 billion

Fed Purchase of Long-term Treasuries

Federal Reserve

$300 billion

Term Securities Lending Facility (TSLF)

Federal Reserve

$225 billion

Economic Stimulus Act of 2008

U.S. Treasury

$168 billion

Other loans: Primary Dealer Credit, etc.*

Federal Reserve

$138.2 billion

Paid to JP Morgan Chase (NYSE: JPM  ) to settle Lehman debt

Federal Reserve

$138 billion

Bank of America (NYSE: BAC  ) guarantee

U.S. Treasury / FDIC

$118 billion

AIG (NYSE: AIG  ) Bailout (excluding TARP)

Federal Reserve

$110 billion

Bear Stearns brokered sale

Federal Reserve

$25.9 billion

I'm afraid to look ...



*"Other loans" total from the Fed's statistical release as of March 18, 2009, which includes discount window lending to banks and brokerages, and the Asset-Backed Commercial Paper Money Market Liquidity Facility.

To be clear, a sizeable disconnect remains between the number of casino chips presently in play and the pile from which more chips may be drawn as needed. Furthermore, to peer ahead toward the ultimate scale of these responses, I have included the following: the $750 billion placeholder inserted into President Obama's 2010 budget for additional bailout funds, and the $500 billion request for FDIC credit now before the Senate with support from key officials.

Wrap your head around this
As mere mortals, Fools are still grappling with the ability of these gargantuan numbers to defy the brain's visualizing capabilities. Try picturing 13 of these. At $44,297 for every American, the sum outstrips the mean annual wage of American workers. At more than $120,000 per household, the sum could have placed us well along the path to energy independence by providing a hybrid vehicle from Ford (NYSE: F  ) , an 8 kW solar panel installation, and a small wind-powered generator to every single American household.

The Yucca Mountain of debt
The glaring message from Washington that dollars will be hurled at this crisis in any quantity deemed necessary raises legitimate concerns about the future purchasing power of the dollars in your wallet, your CD, Treasury bonds, or other dollar-denominated instruments. Occurring in a vacuum, a deleveraging event like this one would be decidedly deflationary. In the context of these outlays, however, I believe stagflation will instead be among the words used by historians to describe this period.

Thankfully, one advantage of our modern financial system is that investors can look to defend themselves against the potential backlash of this response strategy by looking abroad. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify investment opportunities for Fools who wish to diversify out of the domestic markets, and they're ready to share their findings with you.

Further Foolishness:

Fool contributor Christopher Barker thinks his great-great-great-grandchildren may still be paying this debt. He owns no shares in the companies mentioned. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. JPMorgan Chase is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy has a squeaky-clean balance sheet.

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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 March 24, 2009, at 7:57 PM, Dart65GTConv wrote:

    You can play and lose on credit and run away from the disaster. Remember the president is not playing in Vegas, and has first class security and pention. Leaves a lot to worry about.

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