Were Wall Street Banks Bailed Out?

What kind of a question is that? Doesn’t everyone know that the great bailout of the last decade was of “the big banks”? Isn’t that why small groups of Occupiers are shivering in public parks and plazas across the country? Isn’t the bailout of Wall Street the reason why millions of Americans have lost faith in both their government and private enterprise?

I used to think that revisionist history could be written only after lots of people who know better have died. Over the years, however, I have realized that this isn’t true. It is common to see history rewritten before our eyes. Still, even in that context, the myth of the Wall Street bailout is remarkable. A very smart reader with decades of experience in finance writes:

The continuous noise from the left, the MSM and, of late, the Occupy Wall Street rabble and their enablers about “banks” being “bailed out” has now gone beyond normal bounds of exaggerated political rhetoric and verged into financial Luddism and demonization. In fact, the left and MSM have so successfully seized the dominant narrative that it is taken now as an immediately obvious fact that the “Wall Street banks” were “bailed out” by taxpayers.

But is it true? Were the banks really “bailed out”? The image suggested is that the U.S. government just “gave” money to large banks, no questions asked…and thereby rescued them, apparently by making them whole on losses incurred in a corrupt process.

But this picture of the TARP program in 2008-9 is completely false, especially compared to actual bailouts made to Democratic constituencies that DO conform to the “bank bailout” image: the auto industry quasi-nationalization and UAW payoff and the exercise of FNMA/FHLMC guarantees. The bank programs were nothing like the bailout of GM or Chrysler, which were actually given money both directly and indirectly, through special tax legislation creating a loophole worth about $45 billion in foregone taxes, most of which will never be recovered. And at the same time an irregular process robbed senior creditors–now THAT’s a bailout!

But in what sense were “the banks” bailed out? They weren’t in fact “given” any of our money. Indeed, most of the largest banks which were perfectly healthy were forced to take TARP funds so that there would be no stigma attached to the few large unhealthy banks…and the MANY unhealthy small community and regional banks.

Banks in a fractional reserve system are uniquely fragile. They don’t actually “have” any of their “own” money, of course; they have mostly other people’s money–deposits, CDs and wholesale funds (interbank loans and other debts) on a relatively small capital or equity base to fund their assets (loans). NO bank is or can be solvent if the public thinks it is not. That’s why a run is a self fulfilling prophecy.

The Fed and Treasury were acting as lenders of last resort to the entire banking system which was experiencing a classic run. This is EXACTLY what they are supposed to do: offer short term liquidity facilities in an emergency–loans, not grants–collateralized by illiquid but valuable assets. Indeed, in a bit of irony–or double standards–agencies like the FDIC and the Federal Reserve System, collectively designed to prevent and ameliorate runs on the banking system, were formerly proclaimed as Progressive and New Deal triumphs precisely because they prevented harm not to “the banks” but to their creditors and borrowers and the economy as a whole.

Virtually all of loans made to the large “Wall Street banks” were repaid in short order–and profitably!–again, exactly what you would expect. In fact, the 30 largest institutions got about a quarter of the program amount and the balance went to hundreds of small, regional banks, notoriously unstable particularly from exposure to commercial real estate lending. They were the principal lenders to the real estate developers who were actually building all the bubble housing. In fact, it is exactly the SMALL banks, the homely, patriotic, local, “It’s A Wonderful Life” community banks who are the scofflaws–the reckless lenders to real estate developers–who remain “bailed out”, not “Wall Street.”

From SIGTARP Report 10/31/2011:

A common misperception is that most of the 707 TARP banks have paid back TARP, when really only the largest banks have exited TARP. Smaller and medium size banks are not exiting TARP with the same speed as the larger banks, with approximately 400 still in TARP. Of these, nearly half are not paying their TARP dividend and in some cases, the banks are operating under an order by their regulator. Compared to larger banks, community banks may face an uphill battle to exit TARP. Community banks do not have the same access to capital as the larger banks. They are more ex­posed to distressed commercial real estate related assets and non-performing loans.

The “Wall Street banks” weren’t “bailed out.” Depositors, lenders and the entire financial system–one could say, the 99%–were bailed out. This includes, of course, those 99%-ers who successfully flipped houses with sub-prime financing (one third of sub-prime loans in California in ’06 – ’08) and those 99%-ers who sold at the top of the bubble at inflated prices and had enormous windfalls of capital gains.

So in what sense were “banks” “bailed out?” They weren’t “given” anything–and certainly not by the 47% paying no income taxes! Large banks were forced to take liquidity loans by the lender of last resort to prevent a bank run, protecting the 99%…while their equity holders got mercilessly hammered in the market, essentially wiped out. Most “bankers” had huge amounts of their bonuses and net worth in options or in equity in the bank, respectively, which also became nearly worthless. Hundreds of thousands of “bankers” lost their jobs and will never work in finance again, most likely. This is a “bailout?”

Look closely at who REALLY got bailed out, defined as having government grants or equity infusions or long term unremitted TARP or government guarantees funded, together with anticipated permanent losses. The largest single holders of government funds remaining are:


It’s all a convenient distraction from the government sponsored and engineered housing bubble, which was aided and abetted by a huge and pervasive real estate industrial complex in every Congressional district lavishly maintained by lobbying and funding from FNMA and FHLMC to keep the game going. After all, where did the loan proceeds GO? ANSWER: to developers, brokers, construction unions, contractors, landowners, lawyers, appraisers, servicers, local governments and boosters, real estate agents…AND homeowners. And house flippers, getting windfall gains.

That’s where the wealth transfers from the bubble overwhelmingly ended up. The fees “Wall Street bankers” made (2% – 3%) and the net interest spread and returns expected by investors–but subject to losses–pale in comparison to the application of proceeds to the other beneficiaries. It is impossible for it to be otherwise. You might call them the 99%. Sure, the banks got fees but the 99% got the aggregate net principal from the loans. In the end there was, indeed, a wealth transfer, ultimately from taxpayers (and to a lesser extent from investor losses) paying for FNMA/FHLMC and other government agencies. But the wealth transfer was primarily TO the 99%, not to the “Wall Street banks”.

The real story here, as the numbers show, is the disastrous role and huge bailout of FNMA/FHLMC–Friends of Bill (Clinton) and Friends of Barry O and Barney (Frank) and Chris (Dodd). FNMA/FHLMC is government directed industrial policy for the housing and real estate sectors. Banking and finance is always a derivative or “following” activity, led by the “real” economic sectors. Banks certainly accommodated the housing bubble and in the process kept it going, but they didn’t create it. The government did, responding to and developing further long-standing New Deal/Great Society housing initiatives.

Of course, the banks large and small made as much money as they could from the process, as did everyone else, and did become reckless. They’re hardly innocents in this sad tale, but they weren’t “bailed out” in the commonly understood sense. And taxpayers will end up holding the bag for the government which directed allocation of capital to housing and to automobile worker unions, not to Wall Street.

But we shouldn’t hold our collective breath for an Occupy FNMA/HUD, or Occupy GM, or Occupy Local Friendly Bank, or Occupy Barney any time soon. For the left and the MSM, the story line of the “Wall Street banks” is just too good to check.

The large banks (“Wall Street”) are being demonized for accepting loans which some or most of them did not want, and which they repaid quickly with interest. I am not sure whether it has been publicly reported, but the CEO of one of the largest banks–one that recently was besieged by “Occupiers”–repeatedly refused to accept TARP money, and was finally told that he would not be permitted to leave the room until he signed a TARP agreement.

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