Bailouts for Everyone, Forever

Posted by Ray on December 29, 2009 under Main | Be the First to Comment

GMAC is apparently close to yet another $3.5B in additional aid from the government. This is on top of the original $12B the firm already received the first go around. Of course, the government will insist that this ‘investment’ will be profitable just like CIT, GM, Chrysler and anyone who invested with Bernie Madoff. This news comes on the heels of the Freddie and Fannie announcement that the government will backstop all, not just the original $400B, of the GSE’s losses which could be trillions at the end of the day.

Of course in the case of Freddie and Fannie the top executives will continue to receive millions in compensation because it takes talent to lose billions, it must because Brewster, of Brewster’s Millions, could barely do it if you remember. I find it hard to believe that anyone could possible argue that these bailouts are not permanent or will end at any point in the future. I think this latest blast of reality from the state owned automaker and mortgage issuer is proof enough that these bailouts will continue indefinitely.

The irony is that we are seeing all of these bailouts or ‘additional investments’ in the face of the greatest economic recovery that never was. Let’s face it, when the fantasy 3.5% GDP was whittled down to 2.8% you could live with that because that meant there was still private sector activity, but now that the official 3Q09 GDP figure is 2.2% that means there was no private sector activity at all. That was also with cash for clunkers and the housing tax credit in full force as well. Of course last week’s housing numbers showed us what the housing numbers will look like without government help, in a single word awful, but imagine when mortgage rates are at 6%. Regardless, if things were rosy then I find it hard to believe that GMAC would need more money.

Oh, I forgot, Citi and the rest of the banks are paying back TARP, sure, that means that banks are doing fantastic. Did you read the beginning of the story, the bailouts are permanent and these banks know 2 things, 1) the government will never let them fail; and 2) TARP is not going anywhere. Not only that, but these banks also carry massive guarantees on their portfolios and FDIC issued debt so the repayment of TARP, I am stealing this from Whitney Tilson, is the greatest scam ever. Basically the banks now can pay themselves whatever they want, they have guarantees on the crap on their books, implied guarantees, can issue guaranteed debt (in some cases), now they pay far less for many of those privileges and the government lost 90% of its leverage – nice job guys.

The payback of TARP does not mean banks are healthy it simply means the banks can go to the market and get other suckers to buy their debt to get Uncle Sam off their back. I did not think it was very hard to figure out, but apparently it was because the media and investors are swallowing this stuff hook line and sinker. The proof is in the pudding and bank stocks have done nothing since August and, frankly, the only good one is JP Morgan and who really knows what is on their offshore books or what they are really on the hook for through Bear? To think there will not be a need for another TARP bailout in the near future is crazy, banks would not be holding all this cash if; 1) the economy was really recovering; and 2) they were really as healthy as they want us to believe.

I may have been wrong about a correction this fall, I admit that, but there is no way that the continuous flow of bailouts can be framed as a good thing. Oh, if you are happy about Freddie and Fannie executives paying themselves millions, I would suggest calling your representatives and letting them know how you feel, especially if your in Barney Frank’s district because he really doesn’t care about you.