...Or are we really just burning all that money?
March 23, 2009 10:13 AM   Subscribe

So where is all this bailout money actually GOING? It winds up in someone's pockets eventually, right?

I get that the banks are supposedly just being given more money so they'll be more willing to lend it... but all that money they had went in someone's pocket, right?

And the AIG bailout money is being used to pay off their own unwisely-issued policies on defaulted loan packages from the banks... right? Which means that's really just money that goes directly from the gov't to AIG to the financial institutions themselves, right?

Or is the motivational poster of the Bailout where the (Heath Ledger) Joker's standing in front of that big stack of burning cash basically accurate?

I swear to God, I passed Econ in college. I got a good grade, even.
posted by scaryblackdeath to Work & Money (8 answers total) 2 users marked this as a favorite
Well, first it went to the banks, and then who knows. Supposedly the banks are more willing to lend money now then they were in the past. In the case of Bank of America apparently they lent a lot of it to themselves.
posted by delmoi at 10:20 AM on March 23, 2009

Who are the AIG counterparties?
posted by Pants! at 10:37 AM on March 23, 2009

Its slightly more complicated than that. First, the Bailout "TARP" is different from the A.I.G. monies. A.I.G. lost a pile by trading in derivative securities linked to mortgaged loan packages that were securitized (turned into shares and sold). Unfortunately for the economy, A.I.G. was the biggest guarentor of financial deals out there. So for a bond issuance or a lease back arrangement for an airline or a transit system, A.I.G. guaranteed that the bond holders would get paid back. But the agreements for those instruments require that A.I.G. maintain a AAA rating, or the bond holders (represented by a trustee) could demand the money they lent back all at once, even if the bond issuer was paying off like they should have.

Therefore A.I.G. has to stay afloat or a whole bunch of businesses which were just doing fine go right down the tubes.

A.I.G. owes the holders of the derivative securities a lot of money, as in many times what the company is actually worth. The money is going to them. They are known as counter-parties.

Other banks are more or less exposed on similar deals and are not lending becasue they need money in case they have to pay off their counter-parties too. That caused a credit crunch. Once the counter-parties get their money, the banks can start lending again.
posted by Ironmouth at 10:38 AM on March 23, 2009 [1 favorite]

Rolling Stone article. The last few pages adress your question.
posted by mandapanda at 10:40 AM on March 23, 2009

So here's how it works. Like every other business, a bank has a balance sheet. On one side are assets, and on the other are liabilities. A typical bank balance sheet might look like this (made-up numbers):

CDs: 15M
Long-term deposits: 30M
Short-term deposits: 50M
Capital: 5M

Mortgages: 100M
Business loans: 75M
Credit card loans: 23M
Cash reserves 2M

As you notice, one line of "assets" is capital: this is the amount that the bank owes its owners; essentially, the value of the bank. The total value of assets always equals the total value of liabilities: any fluctuation in the value of the assets must be matched by a corresponding change in the value of the liabilities, or it will change the value of the bank's capital. The government requires a certain proportion of the bank's liabilities to be made up of its capital; this ensures that owners of banks cannot (or shouldn't be able to) expose their lenders to risk without exposing themselves to risk as well.

Anyway, now what happens if those $100M in mortgages turn out to actually be worth $80M?

Our new balance sheet has only $180M in assets. So now, the bank's capital has to adjust to make the value of the liabilties equal to $180M too:

CDs: 15M
Long-term deposits: 30M
Short-term deposits: 50M
Capital: -15M

As you can see, now the owners of the bank collectively owe the lenders three times the initial value of the bank! If the lenders notice this, they will all want to make sure they don't lose their money, withdraw it all from the bank and force it to liquidate its assets and eventually go out of business. But if every bank is doing this, it will depress the value of the assets of all the banks, causing a chain reaction! So the TARP is essentially adding new bank assets to make sure the banks maintain positive capital (and enough of it that their lenders don't freak out). Now their assets might look like this:

Mortgages: 50M
Business loans: 75M
Credit card loans: 23M
Cash reserves 2M
Treasuries from TARP 50M

and they have positive capital again.

So to answer the question, the banks keep the money (or at least use it to buy liquid, short-term securities like treasury bills).
posted by goingonit at 1:44 PM on March 23, 2009 [1 favorite]

(Oops--Please ignore the fact that I made the liabilities add up to 100M instead of 200M!)
posted by goingonit at 1:45 PM on March 23, 2009

A few weeks ago NPR did a great one-hour special that lays it all out. Stream it free, download the transcript free, or download the audio file for 95 cents.
posted by markcmyers at 2:05 PM on March 23, 2009

In a broad -- macro -- sense, what has happened is that a lot of asset value went poof into nothingness when the bubble(s) collapsed. This made banks more reluctant to lend out what they had for a variety of reasons (including that they themselves have fewer assets today than they did the day before). So the various bailouts, including the dramatic quantitative easing by the Fed, are intended to pump money back into the economy, expanding the money supply, and creating more liquidity in the markets. (I'm oversimplifying mainly so I don't have to resort to technical terms I'll likely get wrong.) In this sense, it's not nearly so important who got it as it is what they do with it. In a very agnostic sense, even if it went to someone who didn't truly deserve it, as long as it helps liquidity it's all good. Unbelievably and gallingly so.
posted by dhartung at 11:14 PM on March 23, 2009

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