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Question about the 2008 bank bailouts

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Hi Cullen,

I was wondering whether you can perhaps clarify something for me? In this Wikipedia article it states that the US Government was responsible for the $700 billion bank bailout, which amounted to $2,295 per American citizen. https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008

Were these bailout funds acquired from the US treasury which would have to be eventually paid back by the tax payer in the future, or was it implemented by the Federal Reserve via Quantitative Easing?

The article seems to strongly imply that all these billions would eventually have to be paid back by the tax payer, and that there was widespread opposition by most mainstream economists at the time. https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008#Economists

So I am a bit confused here…

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Posted by Incognito 7
Posted on 06/15/2017 4:17 PM
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QE and TARP were 2 different programs entirely. TARP was implemented by the US Treasury and involved loans and equity stakes in companies. This program has been tremendously profitable and according to Propublica has resulted in $90B in profits. QE is scored differently, but has been even more profitable by most measures since its resulted in earnings for the Fed of at least $90B for the last 8 or so years.

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Cullen Roche Posted by Cullen Roche
Answered on 06/16/2017 12:42 AM
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    Similar in the UK. The bank support didn’t loose money , it didn’t make a profit either, some positions still outstanding. UK QE has returned about 60 Bill £ from the BoE to the Treasury since 2012, that is from the Treasury’s Gilt coupon payments so not a profit in itself, it does reduce the deficit.

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    Posted by Dinero
    Answered on 06/16/2017 6:21 AM
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      TARP was the “bank bailout” (terrible term IMO). TARP was used for all of the following:
      1. Fannie Mae and Freddie Mac bailout (the largest expense at ~$200 billion)
      2. AIG (~$60 billion)
      3. Big banks (in total ~$200 billion to ~5-6 banks who didn’t need capital)
      4. Auto bailout (this was an actual bailout that cost ~$40 billion)

      With respect to the big banks, the US government basically lent money to the banks for share buybacks at all-time lows. Everyone made their money back here.

      The real expenses to the taxpayer was from Fannie Mae/Freddie Mac (government run organizations), AIG (an insurance company with counterparty risk), and the auto companies (where we did lose money). Contrary to what most people think, the big banks weren’t that big of a problem in 2008. It was really all the other stuff, especially related to GSEs and AIG regarding counterparty risk of CDS.

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      Posted by Suvy Boyina
      Answered on 06/17/2017 2:46 PM
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        Overall, TARP was a positive. There weren’t really losers, as Cullen duly noted.

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        Posted by Suvy Boyina
        Answered on 06/17/2017 2:47 PM
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          In the UK the National Audit Office has run a post-mortem on the ‘bank bailout’:

          https://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/

          A lot that was regarded as a ‘bailout’ was actually something that central banks are meant to do on an ongoing basis – provide liquidity to institutions within their banking system. Some of really big headline numbers were for various guarantees, which were never likely to be called upon – the very fact that you announce that huge guarantees are in place provides re-assurance, which allows the economy to continue to operate, meaning that the guarantees won’t be needed. We saw the same thing over the Brexit vote period in the UK – the BofE announced that they had authorised the creation of £400bn of extra liquidity to be used as required. Of course, it takes nothing to create £400bn of central bank reserves and given that because of QE, no bank was ever likely to need to draw down any of these extra reserves that had been authorised was immaterial. It was a big headline number that seemed to provide re-assurance to those that had no idea what it was all about. It provided re-assuarance that ‘all it takes would be done’.

          Probably the one contentious part of the UK bank bailout was the purchase of equity in Lloyds and RBS. The shares in Lloyds have now all been sold, but it looks like the government will be stuck holding a large shareholding in RBS for some time. It was this step that many views as the ‘taxpayer bailing out the banks’ which continues to grate with so many.

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          Posted by Robert Pearson
          Answered on 06/18/2017 10:50 AM
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            Hi,

            Sorry I don’t quite understand why a tax-funded government bailout was necessary when QE was implemented to swap bad bank assets for high quality T-bills….?

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            Posted by Incognito 7
            Answered on 06/27/2017 7:10 AM
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