Bailout Makes Government Biggest, Not Best, Distressed-Debt Investor Ever

As the U.S. government poured billions of dollars into companies during the financial crisis, it earned an unusual honor: biggest distressed-debt investor in history, the Wall Street Journalnotes.

With about $388 billion invested in troubled companies over the last two years, the government became a so-called vulture investor, buying into entities that others deemed too risky to touch. But according to investors polled by the Wall Street Journal, the government could have done better.

The Troubled Asset Relief Program will cost taxpayers $25 billion, according to the most recent estimate by the Congressional Budget Office. That's far less than the $700 billion that the government pledged. But it's still not a profit: Even as individual investments do well, the total program is not expected to earn money.

Compared to private investors, some of the government's ventures have fared well. As of the beginning of this month, the government has earned 27 percent on its $45 billion investment in Citigroup, the WSJ notes, adding that an index of distressed-debt investors returned 28 percent over the same period.

Profits, of course, weren't the government's top priority when it pledged billions to companies with the aim of averting an even worse crisis than the one that transpired. (Two of the program's stated goals were to spur lending and save jobs.)

Companies that received the taxpayer money have done quite well for themselves. Thanks in large part to TARP and to cheap funding from the Federal Reserve, Wall Street banks are on track to finish their best two years ever. With billions from the government, the five biggest investment banks have seen their revenue reach $93.7 billion so far this year, Bloomberg reported.

Comments

[Arianwen Everett]

10:43 AM on 12/19/2010

Never has the federal government so aptly named a program or policy as TARP. It was a expansive, unattractive cover to hide the movement of trillions of dollars through the Federal Reserve, created from the skins of American taxpayers.

[CoachJM]

12:35 PM on 12/17/2010

William,

You have a fundamental misunderstanding of what a "vulture investor" is.

Vulture investors acquire the assets (or liabilities) of financially troubled entities at huge discounts (think 70-90%) to their nominal or "face" value, even though the true value is much higher.

What the US government did was buy the assets (and liabilities) of financially troubled entities at 100% of their nominal or "face" value, even though the true value was only 10-20% of the nominal value.

This is being a "fairy godmother" investor, not a vulture investor.

JM

[Old Claudius]

07:44 PM on 12/17/2010

Noto Bene, Mr. Alden. CoachJM is entirely correct. As far as he goes...

The US government, through the Fed, also loaned vast amounts, billions and trillions, to the perpetrators of the frauds that brought the United States' economy to the stop from which it has not been able to re-start.

This is paying the gambling debts of the wastrel nephews.

This makes the US government a "senile uncle", too.

[CoachJM]

10:45 PM on 12/17/2010

Claudius,

I think of it as sub-subprime lending.

JM

[ejhickey]

12:14 AM on 12/17/2010

"Thanks in large part to TARP and to cheap funding from the Federal Reserve, Wall Street banks are on track to finish their best two years ever. With billions from the government, the five biggest investment banks have seen their revenue reach $93.7 billion so far this year, "

I guess even a bankster can turn a profit when they get free money. still i wonder how bad off e would have been if these 5 banks had been left to fend for themselves w/o a dime of government money. maybe they would have been forced to renegotiate some mortgages.

[Duppy]

06:22 PM on 12/16/2010

Foreign countries and investors should sue some of these investment banks/advisors to try to recoup some of their losses

[yappnmutt]

02:44 PM on 12/16/2010

what of the 185 billion dollar ILLEGAL PURCHASE of aig?

[Omnix]

02:36 PM on 12/16/2010

Oh, what spin... Instead of graciously thanking the tax-payers for covering their debts, the banks are indirectly accusing the "government" (personification of a non-descript organization that represents the majority of Americans - ie you and me) of predatory practices. A more accurate description would be that a multitude of Americans where sacrificed for the well-being of a few. And the point of this article should be that the largest community-reinvestment effort in history, designed to save the wealthy from themselves, didn't destroy as many people as we thought it might.

[Shewolf68]

02:31 PM on 12/16/2010

No doubt our free enterprise and ethical wall street financial system will help get us out of this status rating, right...right?

It's like watching Rome burn...day after day, after day, after day...

[OutoftheClouds]

02:20 PM on 12/16/2010

By brilliant policy mind do you mean one that can find even more ways to defile our economic system for it's continued cannibalis­tic assault against the slaves known as American's­?

Is anyone interested in re-writing a Declaratio­n of Independen­ce/Restora­tion with me?

The tyrannical parasites in the finance/ba­nking industry are the enemy of humanity, and their crimes against a free people must stop.

If a true American were President - by true I mean one who legitimate­ly represente­d the values and goals of a productive American people - then he/she would have the Marine Corps shut down Manhattan/­Wall Street and put an end to this.

[Kevin Atlanta]

02:18 PM on 12/16/2010

The American Middle Class deserves the bonuses paid for our rescue of these greedy Control Frauds, Embezzlers and Thieves.  The kabuki and fraud of "repayment" of TARP is just one more accounting scam from Bernanke's FED.  The illness runs deep.
We should've nationalized the Too Big To Fail but Dubya's Wrecking Crew and the Holy Republican Cults of Jesus Inc InsaniTEA gave them America's Prosperity to keep their miserable greedy butts from facing what they do to Main Street daily.

[eric14]

02:22 PM on 12/16/2010

Quite.

[ProfessorDuh]

02:11 PM on 12/16/2010

The bankers just want to dip their beaks again. Is that so wrong? How can you be so cruel as to deny them another meal? Off you. Of you.

[PoliticiansRspineless]

02:06 PM on 12/16/2010

The loans were Buddy Loans.. ...drafted by banksters for banksters!

[blood1]

01:37 PM on 12/16/2010

B and M (complaining) about this is going to change a thing.

What is really scary is that funding from ARRA will end early in 2011 and expect Unemployment to skyrocket. No one want's to talk about this as it would be hard to debate why the wealthy soooooo need their extra tax break.

The GOP will come roaring back to life in Jan...and blame it all on the DEMS for allowing this extra tax cut to be put into place. Hypocracy 102...in case we didn't learn enough of Hypocracy 101!

[OldTulsan]

01:47 PM on 12/16/2010

Wait until it's time to increase the debt limit...

http://www.commondreams.org/view/2010/11/22-3
There Will Be Blood | CommonDreams.org

"by Paul Krugman
Former Senator Alan Simpson is a Very Serious Person. He must be - after all, President Obama appointed him as co-chairman of a special commission on deficit reduction.

So here's what the very serious Mr. Simpson said on Friday: "I can't wait for the blood bath in April. ... When debt limit time comes, they're going to look around and say, ‘What in the hell do we do now? We've got guys who will not approve the debt limit extension unless we give 'em a piece of meat, real meat,' " meaning spending cuts. "And boy, the blood bath will be extraordinary," he continued.

Think of Mr. Simpson's blood lust as one more piece of evidence that our nation is in much worse shape, much closer to a political breakdown, than most people realize..."

[blitznstitch]

01:11 PM on 12/16/2010

93.7 billion in pure profit...wow, why aren't we taxing the SH*T out of that?! Oh yea that is right, the Republicans refuse to tax the rich...and Obama capitulated...and now the tax bill will pass and add to our deficit...and we are all suppose to be okay with that because Obama says that in 2012 things will be better and he will fight to repeal the tax cuts for the rich then. I know Obama is rumored to have quit smoking, but I think he is blowing smoke up all of our A**es. 1. He cannot guarantee a better economy in 2012. 2. Bush thought our economy would not suffer from his tax cuts because he put in place an expiration date - yea, that worked out juuuuust greeeat. really really greeat.

[AgingLady]

12:20 PM on 12/16/2010

'Vulture investor'. What a fabulous term. I love it. And I have no idea what it means. Have browsed thru the comments. Seems to be a variety of interpretations.

[Kelly Nickell]

12:20 PM on 12/16/2010

This isn't the full story.

TARP also forced the FED into lowering the ratings requirements of assets it purchased off of the books of the big firms. The idea being that, through the Primary Dealer Credit Facility and lower ratings requirements, the FED could effectively hand out free cash for the more implosion-prone assets these guys had and sit them in the corner until such time as some SANITY and TRANSPARENCY returned to the markets. Neither have happened yet.

I think this means that the FED actually became the toilet bowl through which to flush the detritus. The government should not be in the business of turning a profit. Stabilizing things when the black swan lands perhaps, but someone is going to have to eat the losses one day.

I have a strong feeling it's us, the US taxpayer; why else would deficits suddenly matter, and a group of very wealthy people beg to be taxed?