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A Response to Reader George Jetson

By: Francis Cianfrocca (Diary)  |  January 10th, 2009 at 07:52 PM  | 

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On another thread, you asked the question, Is there a published analysis of the net cost to taxpayers of the TARP plan? Here’s a preliminary draft of one.

This comes from two economists at the University of Chicago, and they find a likely net cost (representing a transfer of value from taxpayers to stakeholders of banks) in the range of a few tens of billions of dollars.

They perform an event analysis of the two market days surrounding Paulson’s forced purchase of preferred shares in nine or ten banks (depending on how you count Wachovia) on October 13.

I like their novel use of liquid market prices for credit-default swaps as a proxy for bond values in calculating the “enterprise value” of the affected banks.

But I’m a capital-markets kind of guy, and I’m not as convinced that they can filter enough noise out of two days worth of data at an exceptionally volatile time to support the conclusion. But again, it’s a preliminary draft of the paper, and of course they’re asking the right questions.

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  • 6eorge Jetson

    All along, my sense has been that the true cost to the taxpayer of the preferred stock infusion would be dwarfed by the true cost to the taxpayer of a $1 trillion stimulus program. (The article estimates the overpayment for the $125 billion of preferred stock to be between $13 bln – $36 bln.)

    I hadn’t realized that there was such a large giveaway (something for nothing) in the FDIC insurance (bond issurance worth way over 75bps for 75bps) giveaway.
    (Estimated to be a transfer of $99 billion out of the taxpayers wallets.)

    Still my ordering of merit of the three headline bailouts holds.

    1) TARP (of most merit)
    While the authors bemoan the wealth transfer from US taxpayers to the bank debt-holders (not stockholders), of whom a significant portion are foreigners, I don’t necessarily see that as a total bad thing. Foreign capital lenders have got to be pissed at us, and the financing cost of doing nothing to back them, even when we aren’t legally required, could be that of a massive withdrawal of capital.
    (By itself (TARP), I’m all for analyzing how to get the most efficient bang for the taxpayer buck. But my point is that the value of the giveaway will likely pale in comparison to the stimulus package.)

    2) Auto bailout (only because to-date it represents a relatively “small” govt budget item)
    Worst aspects of the auto bailout:
    a) Complete disregard for the authority of congress
    b) Taxpayer subsidies to underperforming rent seekers (e.g. UAW)
    But even at a recovery rate of 20% and a probability default of 1.0,
    the cost of the $15 billion loan would be “only” (for now) $12 billion

    3) The stimulus package
    We’ll get a bunch of “stuff” of dubious value, with what Pelosi wants to be
    $1 trillion of funds, which will be much easier to siphon off in subcontracting than the legal claims that the US taxpayers hold in preferred bank stock.

    Anyway, my fear is that most US citizens can’t tell the difference between the “$700 billion” TARP bailout and the “$1 trillion” stimulus package. Comparing those numbers is an exercise in comparing a small apple to a huge orange, respectively.