Bank Bailouts Cost Much Less Than the FDIC ExpectedTo death and taxes, Americans can add a third inevitable thing -- bank failures. The primary reason that U.S. bank failures are so unavoidable is that these institutions can lend out their government-insured deposits to just about anybody for a range of purposes -- the most commonly disastrous of which is to buy or build real estate. When borrowers can't repay the money, the bank goes down, and the Federal Deposit Insurance Corporation steps into the breach -- except when the bank that made the bad loans is deemed too big to fail.

Given the level of public outrage over the government's rescue of banks during the recent financial crisis, the final cost to the taxpayer of keeping those failed institutions afloat turns out to have been relatively modest. According to The Wall Street Journal, the FDIC has paid out a mere $8.89 billion to 165 banks since the financial crisis began. As I learned when I was a consultant for the FDIC in 1982, those payments are part of the FDIC's program of encouraging healthy banks to acquire failed ones. This actually helps the FDIC recover some of the money it pays out to keep depositors whole, by liquidating the failed bank's loans.

Admittedly, that $8.89 billion figure doesn't encompass the real total cost of the bank rescues, because the FDIC wasn't the agency that rescued the "too big to fail" institutions. That's where the $700 billion Troubled Asset Recovery Program came into play. But it turns out that TARP, too, cost far less than expected. According to the Congressional Budget Office, the ultimate tab for TARP is likely to come in at $25 billion. By comparison, that's about 11% of the $220 billion price tag attached to the S&L Crisis of the early 1990s, when 2,100 savings & loans failed in the wake of that industry's deregulation. That $25 billion also amounts to just 7% of the CBO's original TARP cost estimate of $356 billion.

Does this mean that the free market works and we should stop trying to regulate the financial system? Not at all. For example, the FDIC's role in bailing out bankers' bad bets means that the financial industry is only a free market if you define "free market" as, "heads Wall Street wins, tails the taxpayer loses." In my view, a true free market would make Wall Street pay for its bad bets rather than shifting the pain of the losses onto the general public.

How the FDIC Gets Good Banks to Rescue Bad Ones

The FDIC's $8.89 billion in bailout costs came through a specific arrangement called loss-sharing: The FDIC encourages a relatively healthy bank to take over a failing one by agreeing to reimburse the rescuer for some of the losses it will incur when it tries to turn the failed bank's bad loans into cash.

The FDIC has inked such loss-share deals with 236 financial institutions -- agreeing to cover losses on $160 billion of assets, according to The Wall Street Journal. The FDIC forecasts that it will ultimately pay out more than twice what it has spent so far for these agreements. Specifically, it expects to pay out another $21.5 billion from 2011 through 2014.

When we compare the costs of rescuing the world from the financial crisis to the cost of saving the United States from our S&L debacle, it looks like we've gotten much better at cleaning up the messes bankers leave behind them after they collect their hefty compensation packages. But if you take into account the $12.8 trillion in U.S. government guarantees and cash, the $23 trillion in lost stock market value, the $14.2 trillion national debt, the $1.5 trillion federal budget deficit, and the 14 million unemployed Americans -- all of which can be traced, in part, back to the recent financial crisis, the cleanup costs don't look so small.

The Dodd-Frank Act that was intended to reform Wall Street enshrined the conditions that caused the financial crisis rather than eliminating them: It created a mechanism to rescue banks that are deemed too big to fail; did nothing to change a Wall Street compensation system that rewards closing big deals fast and ignores the cost of their failure; failed to set specific limits on borrowing too much money; and preserved the ability of Wall Street firms and other public companies to write their own report cards.

Wall Street contributed $5 billion to Washington politicians and lobbyists between 1999 and 2008, and as a result, we have the best system money can buy -- a "free market" that gives Wall Street the profits from its short-term bets and shifts the longer term losses onto the taxpayer. Yes, the cost of rescuing the financial system from the financial crisis was lower than was originally expected. But unless we change the conditions that led to the crisis in the first place, we'll pay even more the next time around.


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George Vreeland Hill

President Obama bailed out the banks.
However, the banks went on to take homes from people in record numbers of foreclosures.
A large number of those homes are still on the market and empty.
Many are showing the affects of nonuse.
The worst thing for a house is to be empty.
All kinds of things can happen to it from vandallism to natural damage.
In time, the property will have less value.
Instead of working with those who are having financial problems due to the economy, the banks just take.
The banks have been bailed out.
They were helped with incredible amounts of money.
Yet they will not help the people.
They would rather have a house sit there and rot away instead of letting people stay in them to avoid being homeless.
Where is Obama when it comes to people with little or no money?
He will help the rich, but not the poor.
Investment firms are buying houses at well below their values for future sales, thus making big profits.
The firms visit a house and look for any and everything that needs fixing or an upgrade.
Even if something is in great shape, they will say it is out of date and needs to be replaced.
In the end, they get the house cheap.
Why is this allowed?
The rich get richer while the poor get, well, you know.
Greed ruined the economy in the first place.
Now it is ruining lives.
The future looks scary right now.
The people are accepting what is going on instead of rising up.
We are being taken.
Our own tax dollars are even being used against us.
It is time to wake up or forever be a slave of a system that is not on your side.

George Vreeland Hill

June 08 2011 at 10:34 PM Report abuse rate up rate down Reply
Bob

OH MS. BAIR, WE ARE NOT THAT NAIVE...THE NEGATIVE BALANCE IN THE FDIC FUND IS PROPPED UP BY TAXPAYER FUNDING...IN REALITY,THAT MEANS OUR TAX MONEY PAYING FOR THE SWEET DEALS AND KICKBACKS THE BANK EXECUTIVES MADE BEFORE YOU WAITED TOO LATE TO TAKE THEM OVER. AND YOUR NOTION THAT IT DOESN'T COST THE PUBLIC MONEY, A JOKE, THE REMAINING BANKS JUST RAISE THEIR FEES AND RATES ON US SO THEY CAN PAY THE HIGHER FDIC PREMIUMS FOR THEIR INSURANCE THEN USE SOME OF THAT FOR MORE OF THEIR SWEET DEALS AND KICKBACKS.. SEEN IT OVER AND OVER.

March 28 2011 at 6:44 AM Report abuse rate up rate down Reply
Bob

HA HA HA...THIS IS JUST A DRIP IN THE PERVERBIAL BUCKET..JUST WAIT UNTIL THE REST OF THEM GO UNDER THAT THE GOVERNMENT WILL HAVE TO BAIL OUT AT OUR EXPENSE BECAUSE THEY ARE TOO BIG TO FAIL. MAYBE BANK OF THE WORLD WILL SAVE US ALL..HAHAHAHA...I AM LAUGHING ALL THE WAY TO THE BANK !

March 28 2011 at 6:34 AM Report abuse rate up rate down Reply
arlenandlori

Behind Administration Spin: Bailout Still $123 Billion in the Red

http://www.propublica.org/article/behind-administration-spin-bailout-still-123-billion-in-the-red

The $165B Bank Bailout That Will Never Be Paid Back

http://dailybail.com/home/the-165b-bank-bailout-that-will-never-be-paid-back.html

March 17 2011 at 11:52 PM Report abuse rate up rate down Reply
Sonny

So where did all that money allocated for these programs go????????????????? I bet 'Ole Ben and assosociates found a home for all that extra money!

March 17 2011 at 5:54 PM Report abuse +1 rate up rate down Reply
jkennedy806

four factors demonstrate the FHFA’s full control over the records. Why are we so intent on gaining possession of these records?
Members of Congress have received more than $4.8 million in political contributions from Fannie Mae and Freddie Mac over the last ten years. According to OpenSecrets.org, from 1998 through 2008, the top ten recipients of Fannie Mae and Freddie Mac’s political largess are as follows: Senator Dodd (D-CT), then-Senator Obama (D-IL), Senator Kerry (D-MA), Senator Bennett (R-UT), Rep. Bachus (R-AL), Rep. Blunt (R-MO), Rep. Kanjorski (D-PA), Senator Bond (R-MO), Senator Shelby (R-AL), Senator Reed (D-RI).

Senator Dodd, the top recipient of Fannie Mae and Freddie Mac campaign contributions, was Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is responsible for regulating the mortgage industry. Notably, President Obama was a top recipient of campaign monies despite being in the Senate for only three years. Fannie and Freddie used these political contributions to protect themselves from being held accountable as the housing market was set up for collapse. Now, as a result, taxpayers are on the hook to Fannie and Freddie for at least $400 billion — and $5 trillion in mortgage liabilities. Simply put: We believe the American people deserve to know the full truth about the partnership between Fannie and Freddie and their allies on Capitol Hill.

March 17 2011 at 4:49 PM Report abuse rate up rate down Reply
jkennedy806

four factors demonstrate the FHFA’s full control over the records. Why are we so intent on gaining possession of these records?
Members of Congress have received more than $4.8 million in political contributions from Fannie Mae and Freddie Mac over the last ten years. According to OpenSecrets.org, from 1998 through 2008, the top ten recipients of Fannie Mae and Freddie Mac’s political largess are as follows: Senator Dodd (D-CT), then-Senator Obama (D-IL), Senator Kerry (D-MA), Senator Bennett (R-UT), Rep. Bachus (R-AL), Rep. Blunt (R-MO), Rep. Kanjorski (D-PA), Senator Bond (R-MO), Senator Shelby (R-AL), Senator Reed (D-RI).

Senator Dodd, the top recipient of Fannie Mae and Freddie Mac campaign contributions, was Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is responsible for regulating the mortgage industry. Notably, President Obama was a top recipient of campaign monies despite being in the Senate for only three years. Fannie and Freddie used these political contributions to protect themselves from being held accountable as the housing market was set up for collapse. Now, as a result, taxpayers are on the hook to Fannie and Freddie for at least $400 billion — and $5 trillion in mortgage liabilities. Simply put: We believe the American people deserve to know the full truth about the partnership between Fannie and Freddie and their allies on Capitol Hill.

March 17 2011 at 4:49 PM Report abuse rate up rate down Reply
jkennedy806

four factors demonstrate the FHFA’s full control over the records. Why are we so intent on gaining possession of these records?
Members of Congress have received more than $4.8 million in political contributions from Fannie Mae and Freddie Mac over the last ten years. According to OpenSecrets.org, from 1998 through 2008, the top ten recipients of Fannie Mae and Freddie Mac’s political largess are as follows: Senator Dodd (D-CT), then-Senator Obama (D-IL), Senator Kerry (D-MA), Senator Bennett (R-UT), Rep. Bachus (R-AL), Rep. Blunt (R-MO), Rep. Kanjorski (D-PA), Senator Bond (R-MO), Senator Shelby (R-AL), Senator Reed (D-RI).

Senator Dodd, the top recipient of Fannie Mae and Freddie Mac campaign contributions, was Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is responsible for regulating the mortgage industry. Notably, President Obama was a top recipient of campaign monies despite being in the Senate for only three years. Fannie and Freddie used these political contributions to protect themselves from being held accountable as the housing market was set up for collapse. Now, as a result, taxpayers are on the hook to Fannie and Freddie for at least $400 billion — and $5 trillion in mortgage liabilities. Simply put: We believe the American people deserve to know the full truth about the partnership between Fannie and Freddie and their allies on Capitol Hill.

March 17 2011 at 4:49 PM Report abuse rate up rate down Reply
jkennedy806

four factors demonstrate the FHFA’s full control over the records. Why are we so intent on gaining possession of these records?
Members of Congress have received more than $4.8 million in political contributions from Fannie Mae and Freddie Mac over the last ten years. According to OpenSecrets.org, from 1998 through 2008, the top ten recipients of Fannie Mae and Freddie Mac’s political largess are as follows: Senator Dodd (D-CT), then-Senator Obama (D-IL), Senator Kerry (D-MA), Senator Bennett (R-UT), Rep. Bachus (R-AL), Rep. Blunt (R-MO), Rep. Kanjorski (D-PA), Senator Bond (R-MO), Senator Shelby (R-AL), Senator Reed (D-RI).

Senator Dodd, the top recipient of Fannie Mae and Freddie Mac campaign contributions, was Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is responsible for regulating the mortgage industry. Notably, President Obama was a top recipient of campaign monies despite being in the Senate for only three years. Fannie and Freddie used these political contributions to protect themselves from being held accountable as the housing market was set up for collapse. Now, as a result, taxpayers are on the hook to Fannie and Freddie for at least $400 billion — and $5 trillion in mortgage liabilities. Simply put: We believe the American people deserve to know the full truth about the partnership between Fannie and Freddie and their allies on Capitol Hill.

March 17 2011 at 4:49 PM Report abuse rate up rate down Reply
jkennedy806

four factors demonstrate the FHFA’s full control over the records. Why are we so intent on gaining possession of these records?
Members of Congress have received more than $4.8 million in political contributions from Fannie Mae and Freddie Mac over the last ten years. According to OpenSecrets.org, from 1998 through 2008, the top ten recipients of Fannie Mae and Freddie Mac’s political largess are as follows: Senator Dodd (D-CT), then-Senator Obama (D-IL), Senator Kerry (D-MA), Senator Bennett (R-UT), Rep. Bachus (R-AL), Rep. Blunt (R-MO), Rep. Kanjorski (D-PA), Senator Bond (R-MO), Senator Shelby (R-AL), Senator Reed (D-RI).

Senator Dodd, the top recipient of Fannie Mae and Freddie Mac campaign contributions, was Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is responsible for regulating the mortgage industry. Notably, President Obama was a top recipient of campaign monies despite being in the Senate for only three years. Fannie and Freddie used these political contributions to protect themselves from being held accountable as the housing market was set up for collapse. Now, as a result, taxpayers are on the hook to Fannie and Freddie for at least $400 billion — and $5 trillion in mortgage liabilities. Simply put: We believe the American people deserve to know the full truth about the partnership between Fannie and Freddie and their allies on Capitol Hill.

March 17 2011 at 4:49 PM Report abuse rate up rate down Reply