U.S. News

Imagine the Bailouts Are Working

Andrew Ross Sorkin|The New York Times

What if, after all that panting over Washington’s bailout of the financial system, we learned that it actually worked?

And what if, after all that vitriol over the government’s risking hundreds of billions of dollars to rescue Wall Street from disaster, it turned out that taxpayers might actually lose nothing, or even make a profit?

Joseph Stiglitz
Franco Origlia | Getty Images

Could it be? Really?

Every couple of months the Treasury Department takes a moment to strategically leak some good news about the bailouts. It happened again on Monday, when a Treasury official told The Wall Street Journal that America’s coffers would be only $89 billion lighter after all accounts were settled from the rescues, down from an earlier estimate of $250 billion.

It’s enough to make us all feel rich, isn’t it?

Inside the Obama administration, there are whispers of even greater optimism, with some officials suggesting that if the economic recovery continues apace, the bailout program could eventually turn from red to black.

That may seem far-fetched to anyone who remembers the dire predictions about banks like Citigroup , but the numbers tell a different story. The government’s $45 billion investment in Citigroup alone is on track to make a profit of nearly $11 billion, plus $8 billion or so in interest and other fees.

People inside the administration no longer refer to Citigroup as the “Death Star”; now it is a “profit center.”

Of course, we’re still expected to lose $48 billion on the government’s rescue of the American International Group . But two people close to the board suggested to me that as the company recalculates the value of assets in its portfolio that were once considered “toxic,” the government could actually claw its way back to even on that investment, if it holds on to its stake long enough.

A year ago, by the way, these same people told me they expected the government to take a “$100 billion bath” on its investment in A.I.G.

And then there are the banks that have settled up with Uncle Sam, like Goldman Sachs, Morgan Stanley and Bank of America. We’ve gotten all our money back from them, along with several billion dollars in interest.

Of course, there’s a small problem with all this happy Washington math: it doesn’t take into account the piles of cash we’re likely to lose on Fannie Mae and Freddie Mac, the huge mortgage finance companies. The Congressional Budget Office estimates that figure to be about $320 billion. That would wipe away any gains made elsewhere.

The overall math also doesn’t account for the more than $1 trillion the Federal Reserve pumped into the system through loans to Wall Street that were virtually interest-free.

But if you can put that aside for a moment — and I know that’s difficult to do — do any of these numbers persuade you, the skeptical public, that we might one day declare the bailouts a victory? After all, at this point in the recovery, a fair observer could be forgiven for thinking we were, at minimum, saved from an economic nuclear winter. Newsweek declared on its cover this week that “America’s Back.”

None of this math is likely to lead the American public to declare Mission Accomplished. Outside of Wall Street and Washington, the numbers will never look good enough, because to most people it’s not about justifying the bailout but about avoiding another financial mess in the future. It’s about moral hazard. It’s about right and wrong.

You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.

They argued that Wall Street was occupied by the walking dead, and that no matter how much money we threw at the banks, they would eventually topple the system all over again and cause a domino effect worldwide.

So were they wrong after all?

Joseph E. Stiglitz, the Nobel-winning economist who was among the doomsayers, still isn’t willing to declare victory, and he probably never will.

“I think this is disingenuous and a real attempt to distract people,” Mr. Stiglitz, the author of “Freefall: America, Free Markets, and the Sinking of the World Economy,” said of the latest claims.

Mr. Stiglitz, who has made a career of seeing every glass as half-empty, said we’re looking at the numbers wrong. Even if we get our money back, he says, that doesn’t tell the full story. To calculate the real cost, he insists, we need to add in the lost interest on the money spent.

“Did we get back anything commensurate with the risk?” he asked almost rhetorically, before answering his own question. “Clearly the answer is no.”

Even at this feel-good moment, Mr. Stiglitz refuses to share in the love fest. Like many of us, he is still upset that the government didn’t attach more strings to the bailouts. He also warns of the moral hazard that was created when the government made clear that it wouldn’t let certain big banks fail. This, he says, will inevitably encourage more recklessness on Wall Street.

The next and perhaps final question is whether the government should hold on to its investments in companies like Citigroup rather than sell them off right away.

The Treasury has signaled that it plans to wind down its Citigroup stake. But what if Citigroup’s shares continue to rise, and the government misses out on an even bigger gain? Had the government not let Goldman Sachs and JPMorgan Chase pay their bailouts so early, taxpayers would have made out with even more money.

But as the old Wall Street disclaimer goes, past performance is no guarantee of future results. I suspect that most taxpayers would be happy to take the advice of Kenny Rogers and quit now, while there are still chips to count.