TARP: A Gift for the Bondholders

I can hope you're wrong but I learned decades ago that if I'm hoping and praying, I'm in a bad trade.

Creditors of the banks are themselves political cronies who make a big public show of predicting terrifying potential consequences of not getting repaid for the trembling population they're trying to mug. So much better when the victims help you rob them!

I'm sure you are not wrong. In a free market the lender has a great responsibility to underwrite loans. I don't believe we should feel special sympathy for them if the loans go bad vs if stockholder loose. They have as much responsibility as the shareholders. Without lenders, the boards that shareholders vote in, would not have been able to do the things they did.

Yup. Sadly, you are right here Garett. I am an outside director at a small community bank. We are very conservative, extremely well capitalized and never made a bad loan during the housing bubble. We would have survived without any bailouts but our balance sheet would have taken a big hit. Almost every bond we held would have had a lower market value.

When I made this point to our board and said that we needed to view ourselves as big beneficiaries of the bailout they looked at me like I was from another planet. "But we didn't make those bad loans. All we did was buy AAA bonds. We weren't the problem." they said.

It is true we weren't the problem. But it is a big problem that we still don't know we were among the big beneficiaries of the bailouts.

So we spent $25-$47 billion to avert a probable crisis that would have a lot of additional consequences. The benefit to the bondholders is an afterthought, not unlike my neighbors benefitting from me maintaining my house.

As a side note, how does the accounting of this go? Bush gets the cost of the bailout assigned to him, as the money was spend under him. Does this get subtracted from his debt when the 90% (?) of tarp gets paid back? or does Obama get the windfall?

So we spent $25-$47 billion to avert a probable crisis that would have a lot of additional consequences.

Or perhaps the moral hazard of banks expecting this bailout from the government was the CAUSE of the housing bubble and associated recession (which had significant additional consequences).

And even if you don't believe that, perhaps the moral hazard of the bailouts will encourage future bad behavior by banks causing future significant additional negative consequences...

(file this under "seen and unseen")