Indirect Subsidies Are Bailouts, Too

Dan Gross at Slate pushes back against the false notion that the banks have paid back all their bailouts—a nasty little lobbyist-planted meme that the press needs to nip in the bud.

I noted this morning that The Wall Street Journal editorial columnist Holman Jenkins is already, unsurprisingly, on this train. As Felix Salmon and Simon Johnson pointed out in The Huffington Post, the TARP is hardly the only bailout Wall Street has received, benefited from, or caused. Much of the recession can be laid at its doorstep, as can the need for hundreds of billions of dollars in stimulus.

Gross looks at the indirect costs and benefits of the bailouts, specifically the Temporary Liquidity Guarantee Program, which allowed banks to issue debt by guaranteeing it. That enabled them to issue it when nobody would buy it and now it enables them to pay less for it than they would without Uncle Sam’s benevolent backstopping of it.

This is a huge program. Gross reports that “Private companies were allowed to borrow massive amounts of money—$345 billion at the peak in May 2009—on the public’s credit. At the end of the third quarter, there was still $313 billion outstanding.”

Gross points out that Wall Street claims it’s back on its own two feet now and the government should butt out. Leave aside the fact that Wall Street would be six feet under had the government not stepped in a year and a half ago—that’s gotta be worth something, no?—and looks at what it’s currently doing:

But if these firms are such rugged individualists, why do they persist in borrowing on the public’s credit rather than their own? And why did they do it in the first place? … At any time, the banks could go out into the public markets and raise debt to replace the taxpayer-subsidized borrowings. But they haven’t. The reason: It would make them less profitable. Take Goldman. The chart shows that Goldman was paying a blended rate of 0.767 percent annual interest on $21.3 billion in FDIC-guaranteed debt. For every 100 basis points (i.e., if that debt bore an interest rate of 1.7 percent instead of 0.7 percent), Goldman is saving $213 million in interest costs per year. In the spring of 2009, when much of this debt was issued, the spread—i.e., the difference between the interest rates charged to private-sector corporate borrowers and to the government borrowers—was significant. In April 2009, it stood at 540 basis points. I don’t know what to call this other than a huge subsidy.

In other words, Goldman Sachs would have been paying about a billion dollars more a year in interest (and we’re not even talking about their ability to make money by lending at far higher rates, or spreads, on these low rates)—at April prices, to be sure—if it hadn’t been backstopped by the government.

Gross also points out that the bailouts of Fannie and Freddie saved Wall Street quite a bit of bacon, too.

This is a good start, but what I’d like to see from the press is a full accounting (as much as is possible) of the total direct and indirect subsidies the banks have received from taxpayers. Let’s see those numbers.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.