The horizon is not so far as we can see, but as far as we can imagine

Um Yeah, TARP is “profitable”

Seriously, the idea that TARP is making money is overly narrow, and those who are claiming TARP is turning “profits” don’t understand how this works.

The FED has large special loan facilities to banks, in which it gives them money in exchange for underwater securities.  The FDIC has guaranteed huge amounts of debt issue by the banks.  The FED is letting banks keep bad securities on their books at whatever value they want to claim.  And they are loaning out money at concessionary rates while banks jack up interest rates to consumers, earning spreads of well over 20%.

So yes, the banks are making “profits” and so is TARP.  But not only wouldn’t they be making profits without massive subsidization and what amounts to accounting fraud, whether or not the government is making money overall, or will in the end, on its full panolpy of loans, guarantees and cheap cash is unclear.

Money is fungible.  Give money to one part of an entity, or enable it to borrow money cheaper than it should be able to (that’s what FDIC guarantees are about), or don’t make it recognize losses on its books, and it can take the “profits” it creates and send some of them to repay TARP loans.

TARP is making money because it was decided that it had to make money.  So instead of forcing banks to take losses, or withdrawing special loan facilities, or ending concessionary rates, or making banks retire guaranteed bond issues and reissue them  without the guarantee the banks were encouraged to “repay” TARP.

But if you think that means that the overall panolpy of government aid to banks was profitable, you aren’t looking at the whole picture. It’s like making 5 loans to your deadbeat cousin, and he pays back one while not being able to pay back the others and you say “I made a profit!”  Not yet.

But I’m sure Bernanke and Geithner are pleased that so many folks have fallen for their shell game.


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1 Comment

  1. Americans are great at hiding the truth with tricky accounting or fanciful language. People hate paying ‘taxes’, so we’ll change the collection method and call them ‘fees’ instead. People don’t want to pay for basic services, so we’ll contract them out to private companies (who will of course waste a fortune in graft, greed, mismanagement and basic profit) and then we can ‘balance’ the budget and get a ton of great press. So on and so forth.

    In this case, to avoid the awful ‘socialism’ of fixing the banking system and prosecuting the criminals involved in destroying… well, much of America… we simply handed over a big sack of money to the banks. As long as they say they’re making money, we can continue to live in fantasy-land, where our entire way of life wasn’t just judged and found wanting. It was a fluke, an aberration, a mistake, a crisis, it won’t happen ever, ever again, and if we pretend, err, believe hard enough, maybe it never even happened in the first place.

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