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  1. Wealth
October 8, 2008

The bail-out: what's the cost?

By Spear's

The US taxpayer is being taken for the biggest ride in history.

So Washington approved Hank Paulson’s $700 billion bail-out of toxic waste mortgage assets at the second attempt, but now it has become $850 billion. How did this happen? It’s the Election, Stupid! The extra $150 billion was for ‘pork-barrel’ hand-outs to make sure certain senators got a better chance of re-election on 4 November, that’s what!

Add in $200 billion for Frannie and Freddie and $85 billion for AIG and, ignoring the state guarantees given in the private take-overs of Bear Stearns and Wachovia and Washington Mutual and the next X basket-cases that can still make it to Washington, and the cash total out already stands today at 6 October at $1,135 billion. That’s 1.135 trillion dollars!

No one has come out with an estimate of the likely cost to the US taxpayer. Why not? Because the US taxpayer is being taken for the biggest ride in history and they might get frightened, too frightened even, and so it’s essential for the bankers to get their grubby hands on the dosh first before the whole exercise becomes a disaster.
(Bankers are smart at protecting their own interests, you see: did you notice that of the $1.75 billion Barclays Capital is paying for Lehman’s US operations, that $1.25 billion is a reserve to pay them bonuses for the year-to-date in which Lehman went bust!)

So, let me do a back-of-fag-packet calculation, the sort of thing Paulson may have done as he went to see the President in case George Dubya asked the question ‘What’s the Cost?’ The Dumb One listened and then just said “Let’s do it!” – like it was a good idea, no questions asked.

So here is my calculation… [Thinks]… ‘Hmm. Have we got any precedent for this on which to base assumptions? You bet, this is America, where roller-coasters are big business. The Savings & Loans Crisis of the 1980s, when the US government bought up whole S&Ls, a whole jumbo-load in fact, 747 of them actually, and advanced $400 billion for bad and good assets, please note, and by the end in 1996 had lost 33% of its money.

‘So what percentage to choose now? Remember, they are buying hopelessly bad assets this time, the guaranteed losers at the bottom of the pile, so my guess is that after expenses, which will be huge, that they will do well to recover, and here’s Assumption 1 coming up, 33%, as this is twice as bad and there are no good assets.

‘Assumption 2: the ‘pork-barrel’ quota might as well be poured down the drain, although the odd highway going nowhere might be built. Assumption 3: Paulson’s wiping out the Fannie and Freddie shareholders means there’s no recoverable value for his investment either – not smart. Assumption 4: here’s the good one – AIG will repay its debt in full.’

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So here’s the calculation on the above assumptions:

                                                                                            $ Billions

US Government commitments to date                        1,135                      

Less: AIG 100% recovery                                                85

Less: 33% recovery x $700 billion =                             233             


Total Potential Loss = $817,000,000,000                    817                      

So, the $700 billion bail-out just disappeared into the failed bankers’ pockets – voila!

Maybe Dubya’s not so dumb not to ask the cost question: maybe he just got smart instead!

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