Some of the Wall Street firms who got so-called "bailouts" from the taxpayers are making money again. But this is not a scandal, it's good news. Because the United States Treasury is raking in some of these profits, as a result of the money invested earlier under the Troubled Asset Relief Program (or "TARP"). This should not come as a stunning surprise, but it indeed may to some people -- because of the massive failure to politically frame the issue correctly when the money was originally invested. This failure, it should be noted, is shared by both the Bush and Obama administrations.
Here's a quick quiz: When I say "bailout," what springs to your mind? Shoveling taxpayer money at Wall Street for free? Or investing public funds to shore up our banking system, with the expectation that when times got better we'd turn a profit on these investments? While the program has been derided in the public's awareness as the former, the latter is closer to the actual reality. And the reason many Americans would choose the first answer is a failure of politics.
Because the taxpayers did not just "hand money out for free." Money wasn't just "given" to Wall Street firms. It bought something of value. And now that the firms (and the market in general) are recovering, they're starting to pay it back. With interest.But the news is not all rosy. The jury's still out on a lot of the government money invested in the past year, and some of the firms propped up by this money could eventually fail -- meaning our investment would be worthless. So it's a little early to proclaim a wide-reaching victory for the whole idea.Even so, the news that we're making a profit really shouldn't be as shocking as it may seem. Because that was the plan all along. The reason for the shock is that this message never really got out to the public. Even now, writing about it, I find myself wanting to type "money given to Wall Street" rather than "money invested in Wall Street," because that's the way everyone now talks about it.
But it was investment money. And investments, if things go well, are supposed to make profits. As they now are, at least in some cases. The New York Times has the full story, and if you click on the little "Graphic" button on the side of the article, you can see some hard numbers which show the profits the Treasury is now reeling in. From eight of the largest banks, we've already made four billion dollars profit -- a return calculated at around 15 percent (which is pretty healthy).
The only thing missing from the article, which would have allowed us to put the numbers into some sort of context, was any indication of how much has been paid back in total. In other words, "the bottom line" on the TARP money. We know that $700 billion was authorized for TARP, but we don't know how much of that has now been paid back. Meaning, as I said, it's hard to put the $4 billion into context.
And there is more than one flavor of "bailout." Money was pumped into: banks, investment firms, insurance firms, auto companies, and Freddie and Fannie. So what we're talking about here is a small part of the picture. Some banks' future is still uncertain, and there are still a lot of "toxic" mortgages out there on the books of some of these banks. The Freddie and Fannie bailout (which was a separate piece of legislation, but has tended to get lumped in with all the other "bailouts") may wind up costing us money in the long term. And the auto companies were never intended to be part of TARP in the first place, but were more of a political afterthought. We may still turn a profit from GM and Chrysler, but it may take a bit longer to see that profit (although who knows -- the last time the government bailed out Chrysler we made money when they paid back the loans before they were scheduled to). And, looming over the big picture is still the insurance giant A.I.G., whose future is still uncertain.
Four billion in profits, when held up against the unanswered questions, may not turn out to be all that impressive. But then again, it might be the beginning of the government turning a steady profit on the money loaned out to these various companies. This could make President Obama's job easier on the budget and deficit projections in the future. As the money was paid out, it counted as a government expense, which is a big part of the reason this year's annual budget deficit is going to be so whoppingly enormous. But when the money is paid back, it counts as income. And, especially if this money is paid back faster than expected, this is going to serve to lower deficits in the next few years. Making the whole budget process easier for the president and for Congress.
The banks have a huge incentive to pay this money back as fast as they can, too. In the first place, the longer they hold government money, the longer they have to keep paying quarterly dividends (of five percent) on it. Once it's paid back, these dividends will end. But the real goad to paying the money back is the fact that when the government takes a large ownership stake in a company (like any large investor), it gets a say in how the company is run. Which includes lots of faux outrage over executive compensation (I say "faux" because for all the chest-beating in Washington over the issue, no real caps on this compensation have been set). But it's not exactly the type of press the companies want. So it's a big motivating factor: pay back the money, and the government can't meddle in the companies' affairs any more.
But none of this was ever adequately explained -- by either George W. Bush or Barack Obama. They both could have always spoken of "investment" instead of "bailout," but they didn't. Or if they did, it was drowned out in a media chorus from detractors of the plan. So both Bush and Obama bear a lot of the blame for the failure to adequately explain that this money was being invested in these companies, and that when things got better, we'd get profits from this investment. And, to be fair, when these profits do come to light, both Bush and Obama equally share the credit as well. Both presidents either began or continued some very unpopular programs. They both got Congress to begrudgingly go along with the plan. And they both faced a lot of political heat for doing so. And even though the profits are going to show up on Obama's watch, it would be unfair to say that he deserves all the credit for them. But he's certainly going to be the one to reap the benefits, as in future years he may astonish economists with much better deficit projections than would have been thought possible.
The larger point, though, is that none of this should be as astonishing as it may now seem. If TARP was sold as an investment program from the start, people would think about it in the same terms as they think about their 401Ks -- you invest some money, you take some risk, and you hope for good times and profits down the road a little bit. If that is how the issue had been framed from the beginning, instead of as a "government handout," or a "taxpayer-funded bailout," or "shoveling cash to Wall Street," then we'd all be less surprised by today's news.
Chris Weigant blogs at: ChrisWeigant.com
How will Trump’s administration impact you? Learn more