Does the Bailout Rock?

It’s hard to say anything good about the financial sector bailout. We’re devoting a lot of our very limited reporting resources to muckraking it — both the policy decisions behind it and the implementation of it. But in looking into it (and a lot of the legwork has been done by TPMmuckraker’s Zack Roth) I’ve realized that in a lot of the discussion of this, people are actually exaggerating how bad it is. This isn’t news for people deep into the details. But a lot of the discussion I’ve seen assumes that the $350 billion dollars of bailout money already used has been ‘spent’, as in gone, not getting it back or that it’s been lent out on such bad terms that we’re unlikely to get any of it back.

But that’s not quite right. Most of the $350 billion has bought preferred stock in banks. The rate of interest Paulson got wasn’t nearly as good as several European governments got (5% vs. 10%), not good enough for the risk involved. And a good deal of the money bought not preferred stock but warrants, where the possibility of a return is much less certain, although the upside is arguably higher too. All that said, though, this money has been spent buying what can be legitimately seen as assets, on which we’re likely to get our money back, so long as the institutions themselves do not go bankrupt. (Yes, that last point is a major caveat. But if all of our major banking institutions go under we’ve got even bigger problems.)

There are still lots of problems with oversight, the lack of strings attached and any governing theory of what we’re trying to accomplish. But on this one point a lot of the discussion seems off the mark.

Late Update: TPM Reader TR is not so sanguine …

I think the thing that’s missing in your reporting is that all the major banks (B of A, wells, Citi) are already insolvent and that without the TARP they would have to declare bankruptcy. The press won’t touch the subject, nor will individual Congresspeople for fear of being accused of triggering a panic (see Schumer’s vilification for calling out IndyMac). The whole purpose of TARP is to keep the banks going a little while longer in the desperate hope that the ‘market’ will turn and their worthless assets will magically regain value. It’s a looting/con game of literally historic proportions run by the people who created the mess and have absolutely no clue how to fix it. The major assumption being that there is a fix and that the banks will never, ever have to face the losses that they incurred while generating massive fees, bonuses, and salaries along the way.