Turns Out That Trillion-Dollar Bailout Was, in Fact, Real

By Matt Taibbi, Rolling Stone

20 March 19

A new Washington Post piece fudges the history of the 2008 financial crash

ast summer, Washington Post “Fact-checker” columnist Glenn Kessler wrote that the Medicare for All plan favored by Sen. Bernie Sanders (I-VT) would cause “providers” to face an “immediate cut of 40 percent in their payments.” The piece was quickly amended to reflect that the cuts only referred to private insurance payments, leaving Medicare recipients untouched. A few days later, Kessler would repeat — and later correct again — the same error.

Now, Kessler is fact-checking another statement made by Sanders, this one about the financial crisis in South Carolina:

“Not one major Wall Street executive went to jail for destroying our economy in 2008 as a result of their greed, recklessness and illegal behavior. No. They didn’t go to jail. They got a trillion-dollar bailout.”

On the question of whether or not anyone went to jail for crimes related to the crisis, Kessler is right that one executive, Kareem Serageldin, did get sentenced to 30 months for offenses that could be construed as having contributed to the crash. That his case took place in 2013, well after reporters like Gretchen Morgensen, Louise Story and myself made noise about the conspicuous absence of prosecutions, is beside the point. Serageldin was indeed prosecuted for overvaluing mortgage bonds, and though he wasn’t one of the important players in the scandal by any stretch, he had a title you could technically call “major.”

Still, Kessler concedes, “Sanders’s overall point is valid,” adding:

Almost 900 executives went to jail for the savings and loan scandal in the 1980s, compared with just one person in the 2008 financial crisis.

From there, he asks, “But did Wall Street get a $1 trillion bailout?” He ends up giving this assertion “Two Pinocchios.”

In order, his points:

• The Troubled Asset Relief Program, or TARP, which is what you call “the bailout” if you’re a Wall Street executive trying to make the bailout seem smaller, involved an initial outlay of $700 billion, which Congress later reduced to $475 billion. (The actual ultimate expenditure of TARP was lower than that, at $431 billion, but this won’t matter much, as I’ll show in a minute.


• Kessler says ProPublica maintains a great tracker on TARP spending, and says, “banks and other financial institutions received $254 billion, mostly to replenish capital.” He goes on to say, “But many of those banks are not what one would consider ‘Wall Street.’ Many community banks and credit unions also received TARP funds.” We’ll come back to the issue of the bailout recipients not being “Wall Street.”


• He then adds the automobile bailouts, the bailouts of AIG, Fannie Mae and Freddie Mac, and comes up with a $632 billion sum — still not $1 trillion. He insists this was not just a bailout of big companies, because “the American people” were also helped. “If these banks and other financial institutions had collapsed, many companies would have soon followed, leading to massive layoffs.”


• Lastly, closer to the real point, Kessler disputes the numerous studies showing the real bailout outlay was through the Fed, which the Sanders campaign had said was anywhere from $7.7 trillion (the number Bloomberg used in its coverage of secret Fed lending) to $29 trillion (the number the Levy Institute at Bard College calculated, including guarantees and other forms of aid).

Kessler dumps on these numbers because a) Ben Bernanke once said they were “wildly inaccurate,” and b) because loans listed as different expenditures often represented the same loan simply rolled over. Under that standard, Kessler quotes the Government Accountability Office, which said “loans outstanding for the emergency period peaked at about $1 trillion in late 2008.”

This would seem to get us past a “trillion dollar bailout” already, but Kessler also wants to argue the issue of whether the bailouts were good or bad. What that has to do with fact-checking is not clear, but he goes there. “The Fed is not a Federal Agency” he writes, and insists its bailout facilities made profits and were a social necessity. For instance, he says, they unfroze the commercial paper market, which was “essential for meeting liabilities such as workers’ payroll.” Had the Fed not acted, he says, “the U.S. economy would have ground to a halt.”

This is basically the history of the bailouts as written in self-congratulatory tomes like Ben Bernanke’s The Courage To Act (revised, probably, from My Courage To Act) and Timothy Geithner’s Stress Test. It’s Wall Street’s one-sentence summary of the bailouts: they weren’t that big, but if they were, they were necessary, and made a profit, and even though they made us rich again, they were done for you, the ordinary person!

Let’s start with the notion that “community banks” were also aided in the bailout. There were, indeed, a few smaller banks that participated in the TARP, and in fact, they tended to be in the program longer than the super-sized banks, mainly because they were unable to repay money as quickly.

However, only a section of community banks get into the program. The Treasury Department invested in 707 banks, or about 10 percent of the industry. But 100 percent of the biggest banks were bailed out. As Bernanke told the Financial Crisis Inquiry Commission, of the nation’s 13 largest banks, “12 were at the risk of failure within a week or two” of the initial bailout period, in late September and October of 2008. Every single one of those banks took huge bailout payments.

As Gretchen Morgenson pointed out when information about Fed bailout programs first became public, just six banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — were the recipients of 63 percent of the Fed’s average daily borrowing, representing about a half-trillion dollars at peak periods just for those firms.

Those Fed dollars were doled out through an alphabet soup of different programs (the TAF, the TALF, the TSLF, the TOP, the PDCF, the Maiden Lanes, etc.) and were used to execute major restructurings of the economy. The Fed put up $30 billion to help Chase buy the hulk of Bear Stearns, helping further by buying up $29 billion in bad assets from the dying investment bank.

Citigroup was borrowing $100 billion from the Fed at its peak, Morgan Stanley $107 billion. Fed money was used to broker Bank of America’s absorption of Merrill Lynch and help Wells Fargo buy up Wachovia, in addition to other mergers. At the end of all the rearranging, the 12 largest banks in the country — which had all contributed massively to the crisis and had maybe a week to live when the crash happened, as Bernanke testified — suddenly controlled 70 percent of all bank assets in the United States.

This matters in relation to Kessler’s piece because it had a profound effect on the market. The financial community now knew the government would never let the biggest banks fail, and now those banks had lower borrowing costs than small community banks, for whom the same could not be said. This turned into a so-called “implicit guarantee” that Bloomberg said was worth $83 billion a year by 2013.

The point is, the bailout plan not only didn’t really help community banks, it massively accelerated their disenfranchisement, by placing them in a separate economic class from those deemed Too Big to Fail. This is why the Independent Community Bankers of America supported the bill introduced by Sherrod Brown (D-OH) and David Vitter (R-LA) in 2013 to break up Too Big To Fail banks.

Kessler spends half his time quibbling over the size of the TARP, which was really a minor appetizer on the bailout menu. The bailout was not just the government handing bags of money to companies (although it did that, too). It was an array of programs designed to help the companies who screwed up the worst avoid losses, secure new revenue streams and emerge from the crash not just unscathed, but more powerful than before.

Did Kessler count interventions like the 2008 ban on short-selling of 799 financial stocks, which protected just those companies from (legitimate) market pressures?

CNBC said the ban included “commercial banks, insurers and the two remaining big investment banks, Goldman Sachs Group and Morgan Stanley.” These two massive investment banks had to beg the state to save them from short-sellers! Goldman shares jumped 27 percent after that ban, while Morgan Stanley’s jumped 29 percent. Did Kessler count that increase in market capitalization in his figures?

Did he count the emergency bank charters handed out to Goldman and Morgan Stanley late on the Sunday night of September 21st, 2008? The two investment banks were not commercial banks, but they obtained late-night permission to call themselves Bank Holding Companies, so they would have lifesaving access to borrowing at the Fed’s discount window and could open their doors the following morning. How much would other investment banks have paid for the same stay of execution?

There were so many other interventions. The Post likely forgot that on October 6th, 2008, the Fed for the first time in its history began paying interest on required reserve balances, a perk that one banker described as “paying banks to be banks.”

This was a particularly obnoxious gift to Wall Street since the whole concept of the bailouts was supposed to be unfreezing the economy and spurring lending. But banks were so strapped for safe income sources they began filling reserve balances at the Fed, hoarding cash in search of those interest payments. In 2012, for instance, banks were only required to keep about $100 billion in reserve, but according to the San Francisco Fed, reserves averaged $1.5 trillion over the first six months of that year. That was $1.4 trillion taken out of the economy.

How about the Obama administration’s early-2010 decision to give Fannie and Freddie an unlimited credit line to buy mortgages? Everyone from Darrell Issa to Dennis Kucinich saw through this one.

Raising the caps allowed the two mortgage giants — which, as Kessler correctly notes, had been taken out of the hands of shareholders — to be used as a “backdoor TARP” to “purchase toxic assets at inflated prices.” In other words, the government took over Fannie and Freddie and used the duo in a way private shareholders would never have allowed, as a landfill in which banks could dump bad assets at high prices.

How about the government’s continual efforts to look the other way or lower standards so bailout recipients who should have failed mandated “stress tests” would be allowed to pass?

Several banks got the Fed to drop estimates of capital shortfalls by $20 billion or more after intense lobbying. Citigroup passed one of its early tests when regulators were persuaded to cut billions of an expected hole on its balance sheet based on “pending transactions.” Again, how do you price that kind of aid?

How about non-prosecuting a company crime? Crafting settlements so automatic penalties for certain offenses like the revocation of bank charters don’t kick in? Then there was the too-common practice of letting offenders like HSBC make at least part of regulatory settlements related to crisis-era offenses tax-deductible. This forced all of us to pay for hundreds of millions of dollars’ worth of these settlements.

Beyond all of these gifts, which are difficult to quantify, Kessler has his numbers confused. Even he cites the $1 trillion figure for emergency Fed loans offered by the GAO. Bernanke put the peak-lending figure at $1.5 trillion. Why don’t these numbers by themselves justify the statement, “They got a trillion dollar bailout’?

The Special Inspector General’s office for the TARP program, meanwhile, issued reports for the bailout. This oversight panel led by Bailout author and former SIGTARP chief Neil Barofsky put the gross outlay — including the TARP, and other Treasury and Fed expenditures — at $4.6 trillion. The net outlay they place at $3.3 trillion. Why are these numbers less reliable than the rest?

As I’ve written before, trying to compute the bailout is a fool’s errand, because it was so all-encompassing. The government’s massive treasure dump into the balance sheets of the top banks was a kind of merger, one that obligated us to keep our investments viable going forward though a range of complementary actions.

Those included regulatory relief, inflated asset purchases, market intervention, tax breaks and other actions. God knows how much all of that was worth, but the cash portion of it alone was certainly north of a trillion dollars, when you figure in both TARP and the Fed lending.

Apart from mortgage issuers like Countrywide, the institutions most responsible for the crash were the Too Big To Fail big banks that financed, pooled and re-sold toxic mortgage-backed securities, often fraudulently. Those banks were rewarded with bailouts and state-aided mergers that allowed executives to quickly return to previous compensation levels, and left them more dominant than ever.

The ordinary person couldn’t walk into the Fed and get a new credit card that allowed them to borrow with government’s backing. Wall Street firms could take advantage of a galaxy of bailout facilities that allowed them to do things just like that, like the Temporary Liquidity Guarantee Program. Banks prospered and were made whole; regular people went into foreclosure by the millions and saw their credit ratings ruined.

The Post’s take on this goes beyond fact-check, arguing the bailouts were necessary, appropriately sized and validated by future repayments. But the facts show the crash response was a massive, sustained investment in the wealthiest sector of the economy, which also happened to bear the biggest responsibility for the disaster. The pain was mostly felt elsewhere. Sanders, and the many citizens who helped pay that bill, are right to be upset.