What the 2008 bailouts really cost

I had some extra time today so I decided to take a look at what has happened this year. I wanted to go back and take a look at the various buyouts and bailouts that the Government has backed, and the promises made so far. And the numbers are horrendous.

The main focus so far is on the $1.5 trillion that has been authorized and/or spent thus far. $700 billion for the bailout of mortgages and the credit crunch, and now another $800 billion for mortgages and consumer loans. But those numbers are not the full amount of cost this year.

The year started with the bailout of Bear Stearns. It cost $29 billion to allow JPMorgan to buy that failed brokerage house. And we were promised that would fix everything. Then there was the $150 billion stimulus package that was promised to fix the sagging economy, which failed. Then came Fannie Mae and Freddie Mac, which Representative Barney Frank publicly pronounced as healthy and secure, that cost $120 billion each (not including the $600 billion that is now part of the $800 billion bailout package). And the numbers are still not done.

AIG cost $120 billion by itself. That though was said to be included in the $700 billion authorized by Congress. That means of the 1/2 of the funds given to Treasury Secretary Paulson only $230 billion was available for everything else needed. Not counting the tens of billions given to banks, or the money spent to buy bad loans at unknown valuations.

Of course there was also Citigroup. This cost $20 billion plus $306 billion for guarantees of their bad loans, for a total of $326 billion. Now that is a problem because if the funds came out of the same pool as AIG, we are in a bigger negative than the spending is already creating. A double negative of sorts. And yes I know that guarantees are not the same as cash, but a guarantee must be backed by something besides words. Which means cash from somewhere.

But let us not forget the $25 billion given to the auto industry. And that has nothing to do with the additional $25 billion that is being asked for now, just roughly 5 weeks later. Which is separate money. And that precedent is going to lead to the requests of the airline, credit card, home building/construction and other industries. If the Government is handing out money to businesses, it would be folly not to get in the line.

So the total is $1.94 trillion dollars. Which does not include Citigroup or the additional amounts from the auto industry. Including that figure we get $2.27 trillion in money that never existed and must be repaid. To be exact that means that every American, each of the 300 million citizens, owes $7,567 to the Government.

It is expected that some of these loans and stock purchases will eventually break-even or turn a profit. The expectation is that will happen in 10 - 15 years. Though it is absolutely unclear how the public will be repaid, though the Government will collect all the money. Thus it is possible that the Government will receive money from the public and hold repayments from loans - effectively being paid twice. And it is very likely that any repayment will be funneled into Government agencies instead of the public, as was attempted by Democrats with the first version of the mortgage bailout bill.

But even if 40% of the loans were to make a 50% profit, the bulk of the debt incurred will still be greater. And that does not cover the direct cash infusions made without a loan or repayment provision - which is about 70% of all the funds so far as I can gather.

And the fun does not end there. Remember that President-elect Obama, pushed by House Speaker Nancy Pelosi, has promised a now $700 billion second stimulus plan. The exact details of this plan are unclear, but some amount will be given to the public and some will be used to fund public works. Or so the loose plans state so far. That would mean that in 1 year the cost is $2.97 trillion.

And President-elect Obama still is pushing to add over $800 billion in new spending for new and/or expanded programs. That makes it $3.77 trillion. Or in terms of cost to you and I - $12,567. That's for every man, woman, and child alive right now - working or not.

Put in different terms, this money could have completely funded the entire NASA budget (roughly $419 billion unadjusted for inflation) since inception nearly 10 times over. We could have funded 1,000 moon landings ($36 billion unadjusted) including all the research and development.

Let me make it more personal. That amount is more than the entire net worth of Oprah Winfrey, Bob Johnson, Tiger Woods, Michael Jordan, Tom Cruise, Bill Gates, George Soros, and Warren Buffett combined and multiplied by 10. It's enough money that every single American citizen, of any age, could go to the average college for 2 years. It's enough money to give every American alive today a 10% down-payment on a $120,000 house.

And there is no guarantee, in fact there is reason to highly doubt, that it will get better.

Auto bailout - a sign of bad government

I just love the way that Congress is trying to look tough these days. An auto industry bailout? Hold on, we need details. Right.

Come on, this is the same group of people that handed $700 billion to Treasury Secretary Paulson without a plan. It was the same group of people that fell asleep when Fannie Mae, and Freddie Mac were in trouble (someone wake up Barney Frank). And it was these very same people that gave away $25 billion to the auto industry about a month ago.

Does anyone seriously believe that they won’t bailout the auto industry, and receive neither repayment terms, nor assurances of industry improvement. They couldn’t even create a bailout for the financial industry that could prevent Paulson from moving the money around however he chooses, and that was a concern of House Republicans from the start. With even more Democrats in Congress, and the continued misleadership of Harry Reid and Nancy Pelosi is a better outcome likely?

I’m reminded of a quote from Ben Franklin I believe.

“Doing the same thing over and over, while expecting a different result is the definition of insanity.”

I apologize to Franklin is I got the quote wrong. But the point stands. And it will stay in place until the mid-term elections in 2010. Won’t the damage be interesting to see then.

The fact is that the U.S. automakers need to fail. Let several go bankrupt. It won’t be the end of the world. It will actually be the best thing that could happen.

When large companies fail a couple of things always happens. Several smart businessmen rummage through the wreckage and find bits that they can create new companies with. Those new companies will in part of the gap the old company had, but mismanaged. That spurs growth as a new corporation grows in that niche.

Also the old behemoth of a company slims down. Much of the old baggage is discarded, and the company refocuses on whatever they do best. Renewed energy flows and the company normally creates profits the old company could never do.

This is all good for the economy, though the jolt during the process is unpleasant. But it creates a stronger economy than the one existing before it. And more people are employed after these events than before.

The worst aspect of the auto bailout is the fact that it will be followed by an airlines bailout, and a retail bailout, and probably another financial markets bailout. The Government has made a precedent of stepping into the markets and private industry, because they are afraid of the pain. And in each case it has proven one thing. The Government has no idea what it is doing.

The more socialized things become the more the Government is compelled to step in. The more money is thrown around to avoid feeling bad, the worse everyone feels. Because the Government is incapable of fixing anything, nor can they regulate bad decisions out of business. And they shouldn’t. Bad decisions are normal business and are resolved in the marketplace over time.

Only in America is the concept of perfect markets feasible. It’s stupid and regrettable. But it also seems inevitable. Were that not so, the auto industry execs would never have taken separate corporate jets to fly to D.C. and speak with Congress. They did it because they know they will get the money.

I stated that the Dow Jones will hit 7600 in 2009. But if Congress throw more money at the problems in the markets, and involves more politicians that sleep when they should be watchful (Frank and Chris Dodd) I could be very wrong to the upside.

The bailout and mortgage crisis: Where did it start, who screwed up, who tried to fix it, and when

I just can’t step away from the most pivotal issue in the election and the lives of Americans right now. The spin in the media is that Senator McCain is avoiding Senator Obama on a debate of foreign policy – something McCain has experience at for decades and Obama has a speech in Germany. And many are calling the deep desire of McCain to serve the nation, as was called for by Harry Reid yesterday, a political stunt. Though they ignore the school boy-esque scolding that Obama received when the President called him to the White House today.

But I am tired of hearing Democrats and some media pundits running around blaming every economic woe of the nation on Republicans. There is certainly more than enough blame for all the politicians in Congress, which is why it has the lowest approval rating ever. Republicans have screwed up and spent more than they should. But Democrats have been no better, in fact those that are critical to the finance of the nation have been particularly blind. Mr. Magoo could have foreseen more with their level of information and influence over the years.

But lest my words be seen as partisan, which to an extent I am sure they are as with any pundit or blogger, I present talking heads from across the spectrum of the cable news media and pundits, as well as politicians themselves. Listen to those that we have elected, and their votes and assurances. Then tell me this is only a Republican caused problem.

And please explain to me why we should believe that those that planted the seeds for this problem, and fostered it to the debacle we are required to deal with today, should be believed when they say they have a solution

History of mortgage crisis back to 2003


Fannie Mae and Freddie Mac contributions – Sept 18 2008


Chris Dodd was watching closely but did nothing – August 2007


Treasury Secretary Paulson progress made – February 2008


Barney Frank – Improving regulation of Fannie Mae and Freddie Mac July 14 2008


Obama accuses McCain of opposing reform


Have Republicans tried to do anything?


S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005 - A bill to address the regulation of secondary mortgage market enterprises, and for other purposes.

So I also ask this, If Senator McCain did not go to Washington D.C., if the President did not call Senator Obama to the White House, are you sure there would be a resolution to the bailout crisis? Would that resolution be in the best interest of the nation?

Is a debate, that could be easily rescheduled, more important than the potential of 4 out of 5 Americans losing their homes and jobs?

And lastly, isn’t it a bit hypocritical that Democrats claim that the debate must happen because America wants this; yet they defended Senator Obama when he refused for 2 months every request that was made for Obama to join McCain in speaking directly with Americans at town hall meetings across the nation?

Predicting the U.S. economy for 2nd half 2008 and 2009

Well how much fun are you having today? If you hold investments, it may not be a fun day at all.

Back in the 4th quarter of 2007 I said I believed the Dow Jones Industrial Index would hit 11,000. I thought this would be a move in the late 1st to 2nd quarter. I was wrong… on the timeframe. But this is not a pat yourself on the back kind of moment.

With Indy Mac having failed and fears rampant over whether Freddie Mac and/or Fannie Mae will follow there should be no doubt that the Dow will cross into the 10,800 area on Monday. Add crude oil prices that are continuing to rise on fears from Iran and you get a bad situation. But perhaps the real culprit for this current situation is the Fed (Federal Reserve).

The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters.

Loan reserves must be raised at all financial institutions. That especially means Fannie Mae and Freddie Mac. And several institutions need to fail. That of course means that some people will lose their homes. Nothing can, or should be done about that.

When I some will lose their homes I don’t just mean the roughly 4% of homeowners that are in default. I include in that group those that will fail this winter due to the cost of heating oil increases. I expect that in total some 7% of homes are in danger of foreclosure this year. While it’s not a nice thing to say, they need to lose their homes for the economy to survive.

This is not unlike the enormous wash-out that occurred when the internet bubble broke in the stock market. Money was lost, as it should have been, and opportunities were created. Those that made bad financial decisions, whether corporate or individuals, lost and others benefited from that loss. It’s a standard cycle in the markets.

Of course what is likely to happen is that Congress (with it’s 9% approval rating – sure to go lower) will take taxpayer money and bailout homeowners and financial institutions alike. Thus more water will fill the leaky tub. Undoubtedly the current Administration will be blamed (even more than they should) and the war in Iraq (and possibly Afghanistan) will be identified as the cause of all these ills. Which is false.

The outcome will probably be a surge for Senator Obama, who prefers a bailout. This may lead to him being elected and higher taxes to pay for that bailout. And if anyone thinks a bailout of this size will be limited to just the top 1% of the nation they are insane.

I believe, looking at current factors several things are highly probable:

1. Confidence in all financial will go lower forcing the need for more liquidity
2. Several institutions will fail – focused mostly on those dealing with housing markets first
3. Interest rates will increase by 1pt by the end of 2008, increasing another 1pt early in 2009.
4. Crude oil prices will jump to maybe $160 a barrel by mid-September as winter starts, with a commensurate move in heating oil prices.
5. Gasoline will reach $5.15 a gallon
6. Home foreclosure will hit 5.5%
7. Bankruptcies will increase by 3%
8. Higher energy prices will be blamed for the further slowdown in corporate profits and significantly lower (negative) holiday sales in the 4th quarter.
9. A Democratic Congress will be re-elected
10. Senator Obama will likely be elected
11. Republicans will be blamed
12. Taxes will be increased for all incomes by 3% by 2009
13. Corporate taxes will be increased by 10% early in 2009
14. Inflation will soar unchecked by 3 - 5%
15. Unemployment will grow to 8.5% by December 2008

While each of these items may or may not happen they are all interrelated. I expect each item to happen, at least to the degree I stated, generally in the timeframe given.

As money tightens, gold will be a hedge and prices for all precious metals will soar again. Credit will get severely crunched, and credit card rates will fly. The debt load on the average American will increase from the current $6,000 to $8,500. Most of this increased debt will be from higher energy costs. Thousands of small businesses will shutdown.

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama – for the reasons stated – then I further expect a drop to 9,300 during 2009. A significant bear market indeed.

The main problem is that the solutions being looked at now raised taxes and increased liquidity, fail to resolve the actual problem. And the combination will weaken the dollar, to a point where holding U.S. bonds is unattractive. I won’t even mention the increase in retirees and Social Security.

But there is opportunity. I see the housing markets as a great buy, for those willing to hold for 5 years. Buys in the secondary city markets will probably do best having a lower purchase cost and holding value better.

Several financial stocks will be excellent buys. Some have far better balance sheets than others, but will be blasted by the same investor fears as those in bad shape. Companies like Citigroup are trouble spots as they reinsure their own loans and thus hide them better on the balance sheets. Financials will lead the markets down, but they also will signal the start back.

Coal will likely start to regain interest in the quest for alternative energy sources. I expect nuclear energy will also get a push, with at least 1 new nuclear plant being authorized to be built in 2009. I expect a call to switch to ethanol produced by grass and sugar to go initially unheeded until mid-2010. Further harming the ethanol push is the fact that there will be a glut of ethanol by mid-2009 through 2011.

Bond rates will be more attractive in 2009 than today with the likely increases in interest rates. Of course inflation rises will remove that benefit.

There may be other sources of opportunity but they will be guided by factors including but not limited to:

Iran
Iraq and Afghanistan wars
Crude oil prices
Heating oil prices
Inflation
Unemployment
Manufacturing and Industrial layoffs
Retiree growth rates
Healthcare costs
International political stability
Another terrorist attack on the United States

That is the outlook that I have based on what is currently ongoing in the world today. Some of this is just my on interpretation, some my deduction. But I believe that if only ½ of my expectations occur, the general outcomes as stated are accurate.

But look around and determine your own answers. Better to be prepared than taken by surprise.