Politico published a piece this week by ex-Geithner ghostwriter Michael Grunwald extolling the virtues of large banks and dismissing legislation that seeks to end “Too Big To Fail” (TBTF) as crackpot hysterics. If you’re going to argue in favor of TBTF, then you have come up with reasons why we should be grateful for JPMorgan and Bank of America. To that end, kudos to Grunwald for not backing down. We have mega-banks to thank for swallowing the Bear Stearns and Washington Mutual’s of the world, for financing global mega-projects and mega-mergers (yay!), and for giving reckless traders the opportunity to lose $6 billion in a day. The problem, Grunwald says, is not size, but leverage, and on that end Dodd-Frank and Basell III’s more stringent capital requirements are working. Interestingly, Grunwald’s proof is a link to another article he authored. It summarizes a Government Accountability Office (GAO) study that shows waning expectations of government support, though it has nothing to say about capital requirements. Perhaps I wasn’t supposed to click on it.
At a later date I might offer an exhaustive critique of Grunwald’s TBTF defense. For now, I’d like to address a oft-mentioned claim that sneaks into the middle of the piece, namely that the financial bailouts turned a profit for taxpayers. Here, like before, Grunwald links to a self-authored piece from 2010 that doesn’t really defend the profitability point he’s trying to make. At the time of his 2010 writing, it was being widely reported that the federal government had returned $25 billion in profit on the first $300 billion that banks had paid back. That made for a great talking point for bailout apologists. However, as some commentators made note of, the biggest loans hadn’t yet been repaid, and it was possible that when all was said and done the federal government would lose money. It just so happens that all is now said and done, and while the bailed out banks have returned more nominal dollars then were lent to them, the supposed bailout profit dwindled to $15 billion.
Despite his shady use of hyperlinks, Grunwald is likely aware of the $15 billion figure. That sounds like a lot of money until you compare it to the $426 billion the federal government injected into bailed out companies. Compared to the size of the bailout, the federal government over six years received about a 3.5% cumulative return. That means their investment yielded a 0.57% return every year. Moreover, those figures are nominal, so the real return is even smaller. I suppose you could still stick to the $15 billion figure because $441 billion is indeed more money than $426 billion, but calling it profitable is a stretch. Would anyone consider it profitable to lend someone $10 today, only to be paid back $10.35 in 2021? Of course not. The bailouts can still be defended if it runs at a loss to the federal government – after all the government’s responsibilities extend well beyond making money – but it’s lazy and irresponsible to pad those arguments with eye-grabbing claims about how it turned a profit for “taxpayers”.