USA Bailout: So, How Much Is $700+ Billion, Anyway? And What Would Sweden Do?

UPDATE #1: See the comments to this post for updated numbers and links.

UPDATE #2: See updates and articles on my 2009-2-12 blog post. Also see this New York Times graphic: The tab is now $8.8 trillion, equivalent to the second largest economy in the world, behind USA at $13+ trillion.

The chart above shows the world’s largest economies (measured by GDP), ranked by size.  Assuming the US bailout is only $700 billion, the bailout is larger than all the economies highlighted in yellow.

Note: The bailout is actually already well over $950 billion if you count $150 billion stimulus package (checks to individual tax payers this spring), Bear Stearns, FannieMae, FreddieMac, and AIG.  If you add in the cost to bail out insured bank depositors and all the others who are lining up, it’s going to be well over $1 trillion. But let’s just call it $700-$800 billion for now.  How much is that?

As shown on the chart above (Wikipedia page here), it’s about the size of the Dutch economy, the 15th largest economy in the world (it shows as #16 on the list because the list counts the EU as #1). That’s a lot of “coffee”!

Remember, GDP (the “economy”) is the total value of ALL goods and services produced by ALL people and entities in a country in a year. All that money, down the drain.  Well, not actually down the drain, but into the pockets of those who profited on the way up (privatize the profits) and will profit and/or not lose as much on the way down (socialize the losses).  Nice.  Ok, I better nip that rant in the bud ’cause I gotta hop in a minute.

Real quick, lets say the bailout cost climbs to $1 trillion, how much is that? Larger than Mexican, Australian, and South Korean economies, getting close to the size of Inda’s and not far from Rusia, Brazil, and Canada.

Yeah, it’s that big…

Go ahead and check out the rest of the list to see all the countries this bailout is larger than.

It’s basically a financial black hole, which is going to suck in a lot more people and countries from around the world before it is all over and things start growing again, which they always do — like when a forest regrows after a fire (or the side of a mountain blowing off, like Mount St. Helens, which may be a better analogy).

Ok, let me wrap things up with a New York Times article (below) and a link to the Alan Greenspan memorial website, AlansBubble.com, which I made years ago, as I (and many others) blogged about his bubble and what would come afterward it (this).

Cheers!

Stopping a Financial Crisis, the Swedish Way
By Carter Dougherty
2008-9-23
New York Times
Correction Appended

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

This article has been revised to reflect the following correction:

Correction: September 27, 2008
An article and a picture caption on Tuesday about Sweden’s response to its 1992 financial crisis misstated the position at the time of Bo Lundgren, who described Sweden’s strategy and commented on the United States’ proposals for resolving its own crisis. He was the deputy minister of finance — not the finance minister, a post held by Anne Wibble.
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14 thoughts on “USA Bailout: So, How Much Is $700+ Billion, Anyway? And What Would Sweden Do?

  1. Will be interesting to see the reaction to the USA bailout getting signed, which should happen today. Everyone expects a big rally, and I agree that is the likely knee-jerk reaction. The interesting part will be to see what happens after the initial excitement fades (i.e., if the rally carries through or fails).

  2. UPDATE:

    Burning through cash. AIG (AIG) has been granted access to the Federal Reserve’s new commercial-paper facility, allowing the troubled insurer to reduce its reliance on the costlier emergency loan the Fed had previously extended by $6.8B. AIG is eligible to borrow up to $20.9B under the new program, brining AIG’s access to government money to a total of $144B through three different programs. AIG warns its cash needs could continue to grow if real estate prices decline further. Some analysts wonder how a company that claimed to be financially sound in September could need $140B-plus in October unless the shortfall was hidden all along by irregular accounting.

  3. Taxpayers will take on more risk:

    Nov. 10 (Bloomberg) — American International Group Inc., the insurer bailed out by the U.S., got an expanded government rescue package valued at more than $150 billion after recording a fourth straight quarterly loss.

    The U.S. will reduce the original $85 billion loan that saved AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, the Federal Reserve said today. The insurer lost a record $24.5 billion, or $9.05 a share, in the third quarter, compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement.

  4. From RGE
    2008-11-12

    American Express Gets Access to TARP: Are Monolines, Insurers, Automakers, Hedge Funds Next?

    The U.S. government’s financial-system rescue plans are coming under pressure as a growing array of distressed companies signal the need for assistance. The Treasury has committed all but $60 bn of the first $350 bn in funds granted by Congress under the TARP plan
    American Express won swift approval from Fed to become a bank-holding company; Fannie Mae said it is losing money so rapidly that it may need a cash infusion above the $100 bn accorded already; GM might violate the terms of some of its debt by the end of the year if it can’t steady its finances; AIG’s rescue package was amended and increased to $150 bn–> Pressure rises on Secretary Paulson to request access to the remaining $350 bn TARP funds.

  5. Bailout keep growing (of course). This weekend was $300+ billion to Citi (NYSE: C). According to this Bloomberg article, “U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit” http://www.bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home. That number is going to keep rising, of course, but if they throw enough money at the market, they will be able to arrest the decline, in fact that’s part of what today’s and Friday’s big rallies were/are about.

    It’s socialism for the rich, as described way back on September 9th (and before) by Nouriel Roubini: “Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)”: http://tinyurl.com/comrades-bush-bernanke

  6. RGE:
    Can Central Banks Go Broke? Fed Refuses To Disclose Collateral Composition And Recipients Of $2.8 Trillion Loans:
    Nov 24: The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the U.S. GDP, to rescue the financial system since the credit markets seized up 15 months ago. Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion. The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program (TARP)–> Regulators refuse to disclose who is receiving how much while Congress starts pushing for transparency and give authority over taxpayer money back to elected officials.
    Deloitte: see concise description of Fed lending programs.
    see Cumberland Advisor’s real-time graph of Fed’s balance sheet and the contributions of different lending programs.

    The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

    Buiter: Can the central bank become insolvent? How and by whom or by what institution should the central bank be recapitalized, if its capital were deemed insufficient? These are relevant questions today wherever central banks have taken on large exposures to private credit risk as in the U.S., the Eurozone, and the UK.
    Nov 5, RGE: Fed Balance Sheet Expansion: Change in Formula for Interest Paid on Reserves –> banks are providing the reserves for the Fed’s balance sheet expansion themselves.

    Sep 17: Treasury Announces Supplementary Financing Program to fund the Federal Reserve’s Liquidity Facilities and to manage the balance sheet impact of these efforts.
    Sep 14: Fed Board: “The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks (i.e. including equities). The collateral for the Term Securities Lending Facility (TSLF) also has been expanded: eligible collateral will now include all investment-grade debt securities.
    cont.: “Fed Board also adopted a temporary exception to the limitations in section 23A of the Federal Reserve Act (“Regulation W”). It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board”
    Sep 9 Rogoff: central banks are taking on so much dodgy debt that they will put themselves at risk if they continue extending support to their banking systems
    NY Fed: Discount window loans are generally recourse–> $29bn emergency loan to JPMorgan for Bear Stearns assets on March 17 is explicitly (and exceptionally) non-recourse.On Nov 24 Citigroup also receive a non-recourse loan backstop for its $306 billion of troubled loans and securities.

    IMF: Central bank lending interventions, even if sterilized and only temporary, contribute to socializing losses in the face of privatized profits.

    August 25, Yves Mersch: ECB announces changes to the rules governing its money-market auctions in coming weeks to head off the risk of abuse by financial institutions, e.g.: securitize assets for sole purpose of swapping them with ECB, or regulatory arbitrage wrt other more stringent central bank collateral frameworks.

  7. Fed Refuses to Disclose Recipients of $2 Trillion (Update2)
    By Mark Pittman

    Dec. 12 (Bloomberg) — The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

    Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

    The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

    “If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

    The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

    Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

    ‘Been Bamboozled’

    Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”

    Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.

    On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7.

    In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

    Data Provider

    The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.

    While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as “IDC.” One of the e-mails’ subject lines refers to “Interactive Data — Auction Rate Security Advisory May 1, 2008.”

    Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment.

    “Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.

    ‘Dangerous Step’

    “In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.

    New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion.

    Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

    The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

    ‘Right to Know’

    “There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

    “It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said.

    The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.

    “This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”

    The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.

    Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets.

    Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month.

    ‘Complete Truth’

    “Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”

    The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

    In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.

    “I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.

    The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

    To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net;
    Last Updated: December 12, 2008 17:12 EST

  8. # TARP update. A leaked report from TARP Special Inspector General Neil Barofsky shows the country’s bailouts and backstop plans total $23.7T. Of the $700B slated for TARP, $441B has been distributed. Barofsky will present a quarterly report on TARP to a congressional panel at 10:00 ET, and will criticize the Treasury for not being transparent enough about how it’s spending taxpayer money. (Read Barofsky’s report (.doc))

  9. The bailout sucks for many reasons, mostly because its “Socialism for the Rich” and doesn’t change anything, but I don’t understand why people call it the “Obama” bailout. It was Bush, Paulson, and Bernanke who started it September 2008. On October 3, 2008, Bush signed it into law: CNN: “Bailout is law: President Bush signs historic $700 billion plan”: http://tr.im/zhoZ. That original $700 billion was quickly followed up by billions more under Bush. And Bush is the one who failed to put reasonable, or even any real, conditions on the money. Anyway 🙂

  10. Guest Post: Steve Keen Out-Thinks Larry Summers
    By George Washington of Washington’s Blog
    http://www.nakedcapitalism.com/2009/09/guest-post-steve-keen-out-thinks-larry-summers.html

    EXCERPT:

    So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers… Obama has been sold a pup [i.e. tricked into buying something that is not worth anything] by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

  11. Nomi Prins’s (“It Takes a Pillage”) latest bailout tally: $14 trillion:
    http://www.nomiprins.com/bailout.html

    Nomi Prins is a senior fellow at Demos. She is the author of “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street” and “Other People’s Money: The Corporate Mugging of America.” She was a managing director at Goldman Sachs.

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