The big bail-out

Spreading money

Pushing money on the banks

TARP money to banks in need
The subprime problems became so big, the Congress thought it had to do something. It approved the Troubled Asset Relief Program (TARP). Henry "Hank" Paulson, Secretary of the Treasury and former Goldman Sachs CEO, got $700 billion of "necessary" taxpayer dollars to bail out those he found worthy; "Troubled Assets" was very widely defined so Paulson could use "his" money for almost any purpose. There was a strong opposition. The position taken was strongly depending on personal commitments, those who profited personally where almost 60% more willing to support TARP.

TARP money not used to help economy
Paulson wanted to spread money to all banks so they could start lending to business and get the economy going. He started with $250 billion TARP money for the banks. $125 billion were for the nine biggest; he made them an offer they could not refuse, money against preferred stock. To avoid pinpointing some banks as extra culpable, they all had to be on the deal; when Wells Fargo protested that they had stayed out of exotic mortgage deals and needed no money, they were told to take it or expect trouble on future negotiation with the administration.
The banks were expected to make loans to business and consumers and to help struggling home owners. A journalist managed to eavesdrop on an internal JPMorgan Case conference about what to do with the money. They were not going to give more loans, on the contrary they planned to lend less; instead they talked about buying other banks. Other banks were not more interested in increased lending. Instead they talked about paying debts, acquiring other businesses, investing for the future, building a fortressed balance sheet.

Exploiting federal money

Exploiting federal money
FHA, the Federal Housing Administration, got $300 billion to back subprime loans. So Goldman Sachs, former employer of Secretary of the Treasury Hank Paulson, bought a lot of bad mortgages for 63% of assigned value, made them good by converting them to taxpayer guaranteed mortgages and sold them at 90%.
Not only the banks saw the opportunity for a fast buck. In Florida, a mortgage company granted people FHA-insured loans in its own developments. Half of the loans defaulted and a borrower revealed the business concept. She was paid $19,500 under the table to buy an apartment; she defaulted and FHA had to pay the mortgage company what it claimed the borrower was owing.

Treasury and Fed paying overprice to save AIG
After Fannie and Freddie, AIG was the biggest receiver of bailout money. In all, the Treasury and New York Fed provided a total $182.3 billion to AIG; through loans, buying bad securities, buying AIG stock, backing bad CDSs.
With AIG likely to go bankrupt, they negotiated with the banks for a 40% discount on their CDS payments. New York Fed, at that time under Tim Geithner and with former Goldman Sachs chairman Stephen Friedman as chairman, took over. Together with the Treasury Department and the Federal Reserve, they decided to pay 100%.
Especially Goldman Sachs was instrumental in bringing down AIG. They sold crappy CDOs and bought CDSs. They sold CDOs to others, CDOs insured with CDSs from AIG. When the bubble unraveled, Goldman aggressively marked down their assets so they could cash in on their insurances before others. They even bought CDS protection against AIG.
AIG used more than $60 billion bailout money to pay CDS holders in full, $14 billion to Goldman. With the banks deliberately buying CDSs for CDOs they knew were crappy, there was a real possibility that AIG could sue them for fraud; however, the terms imposed by Treasury and New York Fed barred AIG from doing this.

AIG paying back. How?
Everything was no lost. AIG paid back a total of $205 billion, resulting in a profit to the government of $22.7 billion. Of the securities that New York Fed bought, the last lot was sold at full price to Credit Suisse Securities (USA).
So what happened? Were all those securities good? Was the subprime crisis a scam? Was it a case of bad liquidity, not of bad solvency; was the money locked, not lost? Or is there something behind this, something that does not show? Many banks are paying back; almost half of them unobtrusively with the help of money from other federal programs. Maybe the Feds got some unobtrusive way to sweeten the securities before selling them to Credit Suisse. It would not be the first time the Fed kept the details to themselves. Did the banks pay the money back, not because they were accumulating massive profits as a consequence of their revival, but through accounting tricks sanctioned by Congress and the White House? I don't know but I surely would like to.
And of course the losses for the investors, pension funds and others, are not accounted for.

© Anders Floderus