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Bush Bailouts = Public Profit

August 25, 2009

Now I am the furthest from a Bush administration sympathizer as it gets.  And I was also the furthest from a die-hard supporter of the TARP bailouts of October ’08 you could find at that time.  But in the interest of intellectual honesty, I feel a duty to report this, frankly, surprising news out of the Financial Times today (via Economist:Free Exchange, emphasis mine).

The US government, by contrast, is sitting on a paper profit of almost $11bn on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial institution.

In spite of criticism of the bail-outs of lenders such as Citi, Bank of America and Wells Fargo, the Treasury has reaped gains from the coupons payable under the troubled asset relief programme bail-out funding, most of which has been repaid.

The government said it had earned an annualised return of 23 per cent from its $10bn investment in Goldman Sachs under Tarp. In June, Goldman returned the $10bn and later paid another $1.1bn to buy back warrants attached to Tarp aid. Morgan StanleyAmerican Express and other banks have done the same, leaving taxpayers with substantial profits.

from Financial Times

We still don’t know what the long-term impact of TARP will be.  Will it encourage moral hazard, incentivizing behaviors that represent insane systemic risks in the future?  Does it soften the resolve to prevent future financial institutions from being “too big to fail” in the first place?  Is the U.S. government now the implicit guarantor of the solvency of our largest banks? These are questions we don’t have answers to yet.

What is clear, however, is that the US Government made an extremely prudent gamble, at least in hindsight.  Given the results of TARP, the demands of many to just let these businesses fail, if met, would have unnecessarily left the US economy at the brink of catastrophe while passing up the upside of public profit, which for some reason wasn’t very well articulated during the backdoor wheeling and dealing debate over the bailouts as originally proposed.  In principle, the idea of massive government intervention in the private sector is worrisome, but pragmatically TARP was always by definition a temporary fix for an extremely unique crisis.

What is also clear is that Paulson, Bush, and the centrist members of Congress who enabled the plan should be given a pat on the back for making a very unpopular decision (regardless of what we believe their motivations were). And also that the doom-sayers need to eat some preliminary crow and admit that the worst case scenarios they proposed were not quite as likely as their very certain (as in not probabilistic) and at times condescending language implied.

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