Tuesday, November 25, 2008

Feds Bailout v9.0 Costs $7.76 Trillion

The panicking sailors in D.C. are set to bailout more, faster than ever before. The Federal Reserve has announced...
a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to buy consumer debt securities, The U.S. central bank said it would buy up to $100 billion in debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the government-sponsored mortgage finance enterprises. The Fed also said it would buy up to $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.
I notice that this time they didn't even bother to ask Congress to authorize the money. They're no doubt aware they would've faced a stiff battle, considering how poorly their plans have worked so far. So, conscientious interventionist that he is, Ben Bernanke just took matters into his own hands.

This on top of the recent plan to bailout Citigroup, twice.
Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the F.D.I.C. Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.
This one, however, is even more ridiculous, not to say mysterious. As far as one can make out from news reports, Citi isn't in all that much trouble.

True, they have $5 billion in loans out on which customers are not currently making payments. But they have $24 billion set aside for loan loss reserves. Wouldn't you like to have that kind of rainy day fund? Oh, but they're expenses are so much larger, one might argue. Really? According to a Time story:
For most firms, that's a lot of IOUs to go bad. But for Citi it's peanuts. In fact, $24 billion is just under 3.5% of Citi's overall loan book of $718 billion. And that's not a bad charge-off rate during a time when sub-prime mortgage loans are defaulting in double-digit rates.
I read they did invest heavily in now-not-so-great mortgage backed securities. But when did unfortunate business bets become a reason to burden the taxpayers with the losses? The answer to that, unfortunately, is all too obvious: the day the Feds accepted the nonsensical doctrine of "too big too fail."

Why nonsensical? Citi has 375,000 employees and $2 trillion dollars in assets around the world. That leaves a lot of room for labor savings and, if they should go belly up, a lot of assets to carve up among other, better managed firms. All those people and assets don't just disappear when a bank goes under and there are banks large and small that are not in big trouble, after all. At least, not yet. If the Feds keep this up, we might well see another large-scale period of bank failures of the type Hoover/FDR managed to create.

Like or not, though, expect the bailout frenzy to continue. So far the total is $7.76 trillion in credit or direct investments. Yes, that's trillion with a T. According to Bloomberg, "[t]he pledges, amounting to half the value of everything produced in the nation last year." No telling how high it will go before they give up this insanely counterproductive approach.

The Feds are so focused on the short-term that they can think only about the water streaming in through the hole in the boat. They should stop a second to look around for who might be punching new ones in the other end of the poop deck. But, then, I guess it's to be expected that mirrors on a sinking lifeboat are in short supply.

Update: The Feds have upped the ante to $8.5 trillion. Madness. Sheer, utter madness.

Kelly McPharland, author of the article linked above, makes the point well:
The free market system is being turned into a welfare economy. We’re being trained to accept institutionalized handouts as the norm. I can’t help thinking we’re not going to see the start of a serious recovery until the world’s governments say “Enough,” and turn off the spigots.


Brad said...

So true

When we socialize the risk and privatize the profit, why wouldn't the captains of industry line up to get theirs?

Question seems rhetorical to me.

Jeff Perren said...

Welcome to Shaving Leviathan, Brad and thanks for your comment.

That may be giving too much credit to some of the swine lined up at the trough, and possibly a disservice to some of the others.

The ones lined up are no captains; the others, like the CEOs of Wells Fargo and BB&T have had their arms twisted beyond the breaking point to take money they didn't need and didn't want.

Ain't it a crazy world?