The U.S. economy has come a long way since the low point of the financial crisis of 2009-2008. The stock market is now within a stone’s throw of all-time highs and unemployment is less than 5 percent. The idea that the entire financial system was on the brink of collapse less than a decade ago sometimes feels like simply a bad dream.
The idea of spending billions of dollars on corporate bailouts is enough to get any American’s blood boiling. The good news is the bailouts actually weren’t bad investments in the long term.
Many people are resentful of the idea that the government would step in and bailout billion-dollar corporations. That same government would never step in and directly fund struggling families in times of crisis. To make matters worse, American tax dollars paid for those bailouts instead of better roads and public schools.
In total, 11 companies received at least $10 billion in bailouts from the government during the financial crisis. However, the government wasn’t simply lending money to these companies. It was investing in them by taking ownership stakes. In most cases, the government was essentially buying shares of stock much like ordinary investors do in their trading accounts.
For the most part, the government was later able to sell those shares of stock for a large profit in the years that followed. In fact, the government took a loss on only two of its 25 largest bailouts.
Mortgage aggregators Fannie Mae and Freddie Mac were the two largest financial crisis bailouts. Together, Fannie and Freddie received nearly $190 billion in bailout funds. However, the government has now netted more than $68 billion in profit from the investment. Both companies trade on over-the-counter markets.
Taxpayers also made a killing on the vast majority of bank bailouts as well. The government turned a profit of more than $13.4 billion on its Citigroup (ticker: C) bailout. It also added $5 billion in profit from the American International Group (AIG) bailout, $4.5 billion from the Bank of America Corp. (BAC) bailout and $3 billion from the GMAC bailout.
Of course, not all the bailouts worked out quite as well. Taxpayers lost $11.3 billion on the $50.7 billion General Motors Co. (GM) bailout. Other investments, such as the $3.4 billion Ocwen Financial Corp. (OCN) bailout, the $1 billion Select Portfolio Servicing bailout and the $973 million Nationstar Mortgage Holdings (NSM) bailout ended up total taxpayer losses.
Still, one thing seems clear: taxpayers came out ahead. In total, $623 billion in taxpayer money was dispersed via bailouts and roughly $698 billion has come back via dividend revenue, interest, fees and asset sales. It doesn’t take a math genius to see the bailouts ultimately earned taxpayers more than $75 billion in profit, and that number is still growing.
Of course, the point of the bailouts was never for the Treasury to turn a profit. At the time, those in favor of the bailouts saw them as necessary to prevent a total financial meltdown.
“I think history will look upon the bailouts as broadly necessary, in part because it will also regard the crisis as remarkably complex and dangerous,” Bankrate senior economic analyst and Washington bureau chief Mark Hamrick says. “Reasonable observers would agree the specifics of the programs could have been shaped differently. But that is to quibble over the details in true Monday morning quarterback fashion.”
At the time, plenty of Americans disagreed with the bailouts on principle. But in hindsight, it’s hard to argue with their effectiveness.
“In retrospect, the bailouts were obviously a success because we never went back into a recession,” says Eric Park, financial advisor at LPL Financial. “We’ve only had a couple of down quarters since then. We’re in one of the longest periods of economic expansion without a recession that the country has ever had. But the question remains, what would have happened had the government not opted for bailouts? I don’t know the answer.”
Those uneasy with the promise of corporate deregulation during the Trump administration may be concerned about the possibility of more government bailouts down the road. Bank balance sheets are healthier than ever these days thanks to the regulations Trump may decide to eliminate. Banks also must now submit roadmaps for their own unwinding should they fail, potentially eliminating one source of panic that occurred back in 2008.
“The Dodd-Frank Act contains provisions for the orderly liquidation of a troubled financial firm (similar to the authority the FDIC already has for troubled banks) and prohibits the use of taxpayer funds for any firm in receivership under this process,” University of Alabama in Huntsville associate professor of economics Wafa Orman says. “If the legislation works as planned, then hopefully financial firms should not need bailouts in the future.”
Once financial markets and 401(k) balances stabilized following the 2008-2009 crisis, headlines about the bailouts died down. Now, roughly eight years after corporate irresponsibility nearly broke the American financial system, President-elect Donald Trump has made corporate deregulation a centerpiece of his legislative plan.
Gamblers know that just because a bet works once doesn’t necessarily mean it’s worth repeating. The financial crisis bailouts did…
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