How Much Does the Bailout Really Cost?

by: Ockham Research November 30, 2008    

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Most people would agree that it is difficult to put the cost of bailing out our financial system into real terms. Including the recent Citi (C) rescue, some estimates are as high as $4.6 trillion dollars in total costs. So, we would be remiss in not sharing this shocking visual representation of the government bailout as it currently stands. The chart needs little explanation to get its point across. Jim Bianco of Bianco Research has crunched the numbers, compounding each of these historic government expenditures by the rate of inflation (using CPI) so we can compare apples to apples.

It's impossible to argue that this is a cheap solution to this crisis, but we hope this enormous effort has the desired effect. However, it appears we have little choice in the matter now and a massive full-scale effort to re-ignite the economy is underway. For better or for worse, here we go.

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This article has 16 comments:

  •  
    Nov 30 07:12 AM
    Wow.....for inflation adjusted returns that's not "THAT BAD" yet :)....
    Reply | Link to Comment
  •  
    Nov 30 08:03 AM
    A picture is worth a thousand words!
    Reply | Link to Comment
  •  
    Nov 30 08:49 AM
    Doesn't this assume that every asset that the FED has "purchased" is worth zero?

    Isn't this comparing what are mostly asset purchases (say, Mortgage Backed Securities) with what historically was actual expenses (say, the cost of WWII)?

    Also, at least for Maiden Lane LLC (AIG), I believe the assets were "purchased" at "Fair Value" (meaning market value assuming an "orderly sale").

    I am not saying that there will not be losses on these toxic assets, I am just saying that the losses should be substantially less than 100%.
    Reply | Link to Comment
  •  
    Nov 30 10:20 AM
    Recent estimates put America's corporate losses on derivatives at $130+ trillion. Or in practical terms, more than possible to bail out. The folks that keep harping about a bailout are just plain not looking at the numbers. Stock market losses are some $10+ trillion, real estate losses are working thier way toward that number as well, and will surely get there. Pension funds of just the Fortune 500 were underfunded by some $1.7 trillion BEFORE the stock markety dived, and much of their assets is in stock.

    What the functionaries in DC are doing is comparable to trying to bail out the Titanic with teaspoons. Vallejo, CA declared bankruptcy for lack of property tax receipts. As the home market continues its slide, dozens, then hundreds of cities and counties will follow their lead. Is noone paying attention ? Have we collectively lost our ability to examine a situation and predict the inevitable result ?

    The idea that we can just print up another boatload of money and issue another boatload of IOU's is the Emperor's new wardrobe.
    Reply | Link to Comment
  •  
    Nov 30 12:45 PM
    Axelrod608,

    I believe the $130 Trillion number is the total swap market notional amount, which includes not only credit swaps but interest rate swaps and other swaps.

    Since both sides of the swap are usually counted, and because many of the larger swaps were divided among many counter parties, the numbers you quote WAY overstates the true exposure.

    I seriously question whether there is a lot of unfunded exposure. I am personally aware of swaps done where Lehman was the intermediary, and as part of transaction, the counter party with losses had to post collateral as losses mounted. The swaps were settled as specified in the contracts even though Lehman was bankrupt.

    In fact, it was the collateral that took AIG down even though it is not likely that AIG will ever actually have to pay out any losses on many of the CDOs they wrote the credit default coverage on.

    So, until I see something otherwise, I do not believe that CDS market is in the trouble you indicate. There certainly are losses, but the losses are being funded and are likely to be paid as the contracts specify.
    Reply | Link to Comment
  •  
    Nov 30 01:02 PM
    AP article:

    Neel Kashkari — his first name can be translated as "blue" but is also an ancient Indian mathematical term for the number 10 trillion — was born in Akron, Ohio, and grew up in Stow, south of Cleveland.

    ==

    So, there you have it folks. Neal is in charge of "cash-and-carryin... a good $10 trillion to private bankers. The US should stop outsourcing its banking system to the privately owned and ran Federal Reserve. The US government couldn't run it any worse ... and best of all would NOT have to pay interest to a third-party!
    Reply | Link to Comment
  •  
    Nov 30 07:24 PM
    we can't know that which is not yet known. someday this type analysis can be performed with valid results. after we've stuffed enough worthless digital dollars into the the void created by an excessively infated[worthless] past economy. stay tuned. for how long i hazard no estimate. what are the odds that it's done correctly? what are the consequences with correct/incorrect stuffing? these are worthy subjects for discussion, as they will affect us greatly.


    On Nov 30 12:45 PM CaptainJJack wrote:

    > Axelrod608,
    >
    > I believe the $130 Trillion number is the total swap market notional
    > amount, which includes not only credit swaps but interest rate swaps
    > and other swaps.
    >
    > Since both sides of the swap are usually counted, and because many
    > of the larger swaps were divided among many counter parties, the
    > numbers you quote WAY overstates the true exposure.
    >
    > I seriously question whether there is a lot of unfunded exposure.
    > I am personally aware of swaps done where Lehman was the intermediary,
    > and as part of transaction, the counter party with losses had to
    > post collateral as losses mounted. The swaps were settled as specified
    > in the contracts even though Lehman was bankrupt.
    >
    > In fact, it was the collateral that took AIG down even though it
    > is not likely that AIG will ever actually have to pay out any losses
    > on many of the CDOs they wrote the credit default coverage on.<br/>
    >
    > So, until I see something otherwise, I do not believe that CDS market
    > is in the trouble you indicate. There certainly are losses, but the
    > losses are being funded and are likely to be paid as the contracts
    > specify.
    Reply | Link to Comment
  •  
    Nov 30 07:53 PM
    Wow. I'm thinking of how opponents of the New Deal complained so bitterly about the cost. Maybe the biggest failing was that it was done on the cheap, or maybe we should conclude that New Deal-style spending aimed at the bottom is that much more effective that several times the spending aimed at the top. I'm also amazed by the cheapness of the Marshall Plan, especially when I think of how Americans reflexively complain about foreign aid as if it sucks up most of our money.
    Reply | Link to Comment
  •  
    Nov 30 10:28 PM
    do not confuse costs with 'risk'. if it was cost, treasury would be borrowing an additional $7 trillion - current borrowing yoy is only up a mere trillion.
    Reply | Link to Comment
  •  
    Dec 01 02:53 AM
    Cap'n Jack - The $130+ trillion is not my figuring. It was in an earlier SA article. The biggest problem in this mess is the lack of understanding of the enormity of the problem. Globally there are ove $1,000 trillion in derivatives. If the US has half of that we have $500 trillion. If we assume half is worth face value and the other half is worth 25 - 65 cents on the dollar, the loss is still over $100 trillion.

    The REAL reason banks aren't lending to one another is they know that the other guys are holding a great big septic tankful of derivatives in their level 2 and 3 portfolios.

    We need to stop kidding ourselves and making believe this is all going to work out in a quarter or two and everything will be back to (ab)normal soon.

    Every facet of our economy is unsustainable. The government and Fed actions are nothing more than bandaids.
    Reply | Link to Comment
  •  
    Dec 01 06:33 AM
    axelrod608,

    What would happen if all Credit Default Swaps contracts were declared totally illegal worldwide and banned in an act of global "regulation" after the fact? Or what if we slowly moved them out of the system in 12-18 months by some kind of phased termination by category or class grouping? You are quite right that the fear of CDS financial AIDS is why the credit markets have frozen up. No one knows what each banks true exposure is or even what the various contracts actually say. By simply declaring them void and shredding them, teams of lawyers aren't needed to even read them to try to figure out the true exposure. That is going to take years if we try to settle this by the current means.

    Secondly, does anyone really know the details of the Lehman CDS settlement where $455 Billion in exposure netted out to the manageable figure of $6 Billion? If all counterparty settlements would resolve this way due to various positions canceling out, then why has Paulson become so terrified? Something is missing in this story? WTF is going on?

    Thanks for any comments by you are anyone else!

    On Dec 01 02:53 AM axelrod608 wrote:

    > Cap'n Jack - The $130+ trillion is not my figuring. It was in an
    > earlier SA article. The biggest problem in this mess is the lack
    > of understanding of the enormity of the problem. Globally there
    > are ove $1,000 trillion in derivatives. If the US has half of that
    > we have $500 trillion. If we assume half is worth face value and
    > the other half is worth 25 - 65 cents on the dollar, the loss is
    > still over $100 trillion.
    >
    > The REAL reason banks aren't lending to one another is they know
    > that the other guys are holding a great big septic tankful of derivatives
    > in their level 2 and 3 portfolios.
    >
    > We need to stop kidding ourselves and making believe this is all
    > going to work out in a quarter or two and everything will be back
    > to (ab)normal soon.
    >
    > Every facet of our economy is unsustainable. The government and
    > Fed actions are nothing more than bandaids.
    Reply | Link to Comment
  •  
    Dec 01 08:40 AM
    Diracman - what would happen is first a gazillion lawyers would fight it out in every court on earth. Long term, the result is anyone;s guess. This is a new species of problem. Nothing like it has ever been seen before.

    I suspect a very long, very deep recession from which we only recover if and when we permit the destruction of the very concept of level 2 and 3 assets/liabilities opaquely held off the books.

    I'm no economist. But having read researched and written about problem solving, I know that the one essential ingredient in problem solving is to have a crystal clear understanding of what exactly the problem is and its extent. I don't think our "leaders" - the ones supposedly trying to fix this mess - have either.
    Reply | Link to Comment
  •  
    Dec 01 12:38 PM
    "some estimates are as high as $4.6 trillion dollars in total costs. So, we would be remiss in not sharing this shocking visual representation of the government bailout as it currently stands. The chart needs little explanation to get its point across"

    While acknowledging that $4.6 trillion is high for "costs", the author shows a chart that goes up to $7.4 trillion. This chart is ridiculous without any explanation. At least CaptainJJack was able to provide some points that make sense.
    Reply | Link to Comment
  •  
    Dec 01 01:33 PM
    The point this simple graph fails to depict is the relative size of each item vs. the total GNP/GDP at the time. For instance, while this current bailout has a higher price tag in 2007 dollars than the New Deal, New Deal spending was somewhere above 50% of the mid 1930s GDP.

    I am a staunch opponent of all government interventionism. But I am also a staunch opponent of sensationalism and I hate seeing numbers taken out of context and incorrect comparisons.
    Reply | Link to Comment
  •  
    Dec 02 04:09 AM
    Dec 2, 2008 3:07 AM

    The government should cut off nasa, in the state the economy is in.
    That's always been wasteful spending, in our opinion.
    Reply | Link to Comment
  •  
    Dec 04 08:48 PM
    axelrod608,

    Thanks at your attempt at an answer too. I am just bewildered myself. There is zero transparency about this at every level so it is hard to really define the problem in a clear way. Supposedly every CDS contract is different. There all kinds of different triggering events. Does anyone know of the best books out there on this?

    Thanks again, axelrod608, for reading my post and taking the time to reply!


    On Dec 01 08:40 AM axelrod608 wrote:

    > Diracman - what would happen is first a gazillion lawyers would fight
    > it out in every court on earth. Long term, the result is anyone;s
    > guess. This is a new species of problem. Nothing like it has ever
    > been seen before.
    >
    > I suspect a very long, very deep recession from which we only recover
    > if and when we permit the destruction of the very concept of level
    > 2 and 3 assets/liabilities opaquely held off the books.
    >
    > I'm no economist. But having read researched and written about problem
    > solving, I know that the one essential ingredient in problem solving
    > is to have a crystal clear understanding of what exactly the problem
    > is and its extent. I don't think our "leaders" - the ones supposedly
    > trying to fix this mess - have either.
    Reply | Link to Comment
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