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BAILOUT GROWS: Total relief package up to $8.5 trillion — nobody knows risk to taxpayer

by Kath­leen Pen­der
San Fran­cis­co Chron­i­cle

The fed­er­al gov­ern­ment com­mit­ted an addi­tion­al $800 bil­lion to two new loan pro­grams on Tues­day, bring­ing its cumu­la­tive com­mit­ment to finan­cial res­cue ini­tia­tives to a stag­ger­ing $8.5 tril­lion, accord­ing to Bloomberg News.

That sum rep­re­sents almost 60 per­cent of the nation’s esti­mat­ed gross domes­tic prod­uct.

Giv­en the unprece­dent­ed size and com­plex­i­ty of these pro­grams and the fact that many have nev­er been tried before, it’s impos­si­ble to pre­dict how much they will cost tax­pay­ers. The final cost won’t be known for many years.

The mon­ey has been com­mit­ted to a wide array of pro­grams, includ­ing loans and loan guar­an­tees, asset pur­chas­es, equi­ty invest­ments in finan­cial com­pa­nies, tax breaks for banks, help for strug­gling home­own­ers and a cur­ren­cy sta­bi­liza­tion fund.

Most of the mon­ey, about $5.5 tril­lion, comes from the Fed­er­al Reserve, which as an inde­pen­dent enti­ty does not need con­gres­sion­al approval to lend mon­ey to banks or, in “unusu­al and exi­gent cir­cum­stances,” to oth­er finan­cial insti­tu­tions.

To stim­u­late lend­ing, the Fed said on Tues­day it will pur­chase up to $600 bil­lion in mort­gage debt issued or backed by Fan­nie Mae, Fred­die Mac and gov­ern­ment hous­ing agen­cies. It also will lend up to $200 bil­lion to hold­ers of secu­ri­ties backed by con­sumer and small-busi­ness loans. All but $20 bil­lion of that $800 bil­lion rep­re­sents new com­mit­ments, a Fed spokes­woman said.

About $1.1 tril­lion of the $8.5 tril­lion is com­ing from the Trea­sury Depart­ment, includ­ing $700 bil­lion approved by Con­gress in dra­mat­ic fash­ion under the Trou­bled Asset Relief Pro­gram.

The rest of the com­mit­ments are com­ing from the Fed­er­al Deposit Insur­ance Corp. and the Fed­er­al Hous­ing Admin­is­tra­tion.

Only about $3.2 tril­lion of the $8.5 tril­lion has been tapped so far, accord­ing to Bloomberg. Some of it might nev­er be.

Rel­a­tive­ly lit­tle of the mon­ey rep­re­sents direct out­lays of cash with no strings attached, such as the $168 bil­lion in stim­u­lus checks mailed last spring.

Where it’s going­Most of the mon­ey is going into loans or loan guar­an­tees, asset pur­chas­es or stock invest­ments on which the gov­ern­ment could see some return.

“If the econ­o­my were to mirac­u­lous­ly recov­er, the tax­pay­er could make mon­ey. That’s not my best guess or even a like­ly sce­nario,” but it’s not incon­ceiv­able, says Anil Kashyap, a pro­fes­sor at the Uni­ver­si­ty of Chicago’s Booth School of Busi­ness.

The risk/reward ratio for tax­pay­ers varies great­ly from pro­gram to pro­gram.

For exam­ple, the first deal the gov­ern­ment made when it bailed out insur­ance giant AIG had lit­tle risk and a lot of poten­tial upside for tax­pay­ers, Kashyap said. “Then it turned out the sit­u­a­tion (at AIG) was worse than real­ized, and the terms were so bru­tal (to AIG) that we had to rene­go­ti­ate. Now we have giv­en them a lot more cred­it on more gen­er­ous terms.”

Kashyap says the worst deal for tax­pay­ers could be the Cit­i­group deal announced late Sun­day. The gov­ern­ment agreed to buy an addi­tion­al $20 bil­lion in pre­ferred stock and absorb up to $249 bil­lion in loss­es on trou­bled assets owned by Citi.

Giv­en that Cit­i­group’s entire mar­ket val­ue on Fri­day was $20.5 bil­lion, “instead of tak­ing that $20 bil­lion in pre­ferred shares we could have bought the com­pa­ny,” he says.

It’s hard to say how much the over­all res­cue attempt will add to the annu­al deficit or the nation­al debt because the gov­ern­ment accounts for each pro­gram dif­fer­ent­ly.

If the Trea­sury bor­rows mon­ey to finance a pro­gram, that mon­ey adds to the fed­er­al debt and must even­tu­al­ly be paid off, with inter­est, says Diane Lim Rogers, chief econ­o­mist with the Con­cord Coali­tion, a non­par­ti­san group that aims to elim­i­nate fed­er­al deficits.

The fed­er­al debt held by the pub­lic has risen to $6.4 tril­lion from $5.5 tril­lion at the end of August. (Total debt, includ­ing that owed to Social Secu­ri­ty and oth­er gov­ern­ment agen­cies, stands at more than $10 tril­lion.)

How­ev­er, a $1 bil­lion increase in the fed­er­al debt does not nec­es­sar­i­ly increase the annu­al bud­get deficit by $1 bil­lion because it is expect­ed to be repaid over time, Rogers said.

Annu­al defici­tA deficit aris­es when the gov­ern­ment ‘s expen­di­tures exceed its rev­enues in a par­tic­u­lar year. Some esti­mate that the fed­er­al deficit will exceed $1 tril­lion this fis­cal year as a result of the eco­nom­ic slow­down and efforts to revive it.

The Fed’s activ­i­ties to shore up the finan­cial sys­tem do not show up direct­ly on the fed­er­al bud­get, although they can have an impact. The Fed lends mon­ey from its own bal­ance sheet or by essen­tial­ly cre­at­ing new mon­ey. It has been doing both this year.

The prob­lem is, “if you print mon­ey all the time, the mon­ey becomes worth less,” Rogers says. This usu­al­ly leads to high­er infla­tion and high­er inter­est rates. The val­ue of the dol­lar also falls because for­eign investors become less will­ing to invest in the Unit­ed States.

Today, inter­est rates are rel­a­tive­ly low and the dol­lar has been most­ly strength­en­ing this year because U.S. Trea­sury secu­ri­ties “are still for the moment a very safe thing to be invest­ing in because the finan­cial mar­ket is so unsta­ble,” Rogers said. “Once we sta­bi­lize the stock mar­ket, peo­ple will not be so enam­ored of clutch­ing onto Trea­surys.”

At that point, inter­est rates and infla­tion will rise. Increased bor­row­ing by the Trea­sury will also put upward pres­sure on inter­est rates.

Defla­tion a big con­cern­To­day, how­ev­er, the Fed is more wor­ried about defla­tion than infla­tion and is will­ing to flood the mar­ket with mon­ey if nec­es­sary to pre­vent an eco­nom­ic col­lapse.

Fed­er­al Reserve Chair­man Ben Bernanke “has ordered the heli­copters to get ready,” said Axel Merk, pres­i­dent of Merk Invest­ments. “The heli­copters are hov­er­ing and the first cash is mak­ing it through the seams. Soon, a door may be opened.”

Rogers says her biggest fear is not hyper­in­fla­tion and the social unrest it could unleash. “I’m more wor­ried about a lot of fed­er­al dol­lars being com­mit­ted and not hav­ing much to show for it. My worst fear is we are leav­ing our chil­dren with a huge debt bur­den and not much left to pay it back.”

Eco­nom­ic res­cue Key dates in the fed­er­al gov­ern­ment ‘s cam­paign to alle­vi­ate the eco­nom­ic cri­sis.

March 11: The Fed­er­al Reserve announces a res­cue pack­age to pro­vide up to $200 bil­lion in loans to banks and invest­ment hous­es and let them put up risky mort­gage-backed secu­ri­ties as col­lat­er­al.

March 16: The Fed pro­vides a $29 bil­lion loan to JPMor­gan Chase & Co. as part of its pur­chase of invest­ment bank Bear Stearns.

July 30: Pres­i­dent Bush signs a hous­ing bill includ­ing $300 bil­lion in new loan author­i­ty for the gov­ern­ment to back cheap­er mort­gages for trou­bled home­own­ers.

Sept. 7: The Trea­sury takes over mort­gage giants Fan­nie Mae and Fred­die Mac, putting them into a con­ser­va­tor­ship and pledg­ing up to $200 bil­lion to back their assets.

Sept. 16: The Fed injects $85 bil­lion into the fail­ing Amer­i­can Inter­na­tion­al Group, one of the world’s largest insur­ance com­pa­nies.

Sept. 16: The Fed pumps $70 bil­lion more into the nation’s finan­cial sys­tem to help ease cred­it stress­es.

Sept. 19: The Trea­sury tem­porar­i­ly guar­an­tees mon­ey mar­ket funds against loss­es up to $50 bil­lion.

Oct. 3: Pres­i­dent Bush signs the $700 bil­lion eco­nom­ic bailout pack­age. Trea­sury Sec­re­tary Hen­ry Paul­son says the mon­ey will be used to buy dis­tressed mort­gage-relat­ed secu­ri­ties from banks.

Oct. 6: The Fed increas­es a short-term loan pro­gram, say­ing it is boost­ing short-term lend­ing to banks to $150 bil­lion.

Oct. 7: The Fed says it will start buy­ing unse­cured short-term debt from com­pa­nies, and says that up to $1.3 tril­lion of the debt may qual­i­fy for the

Oct. 8: The Fed agrees to lend AIG $37.8 bil­lion more, bring­ing total to about $123 bil­lion.

Oct. 14: The Trea­sury says it will use $250 bil­lion of the $700 bil­lion bailout to inject cap­i­tal into the banks, with $125 bil­lion pro­vid­ed to nine of the largest.

Oct. 14: The FDIC says it will tem­porar­i­ly guar­an­tee up to a total of $1.4 tril­lion in loans between banks.

Oct. 21: The Fed says it will pro­vide up to $540 bil­lion in financ­ing to pro­vide liq­uid­i­ty for mon­ey mar­ket mutu­al funds.

Nov. 10: The Trea­sury and Fed replace the two loans pro­vid­ed to AIG with a $150 bil­lion aid pack­age that includes an infu­sion of $40 bil­lion from the gov­ern­ment ‘s bailout fund.

Nov. 12: Paul­son says the gov­ern­ment will not buy dis­tressed mort­gage-relat­ed assets, but instead will con­cen­trate on inject­ing cap­i­tal into banks.

Nov. 17: Trea­sury says it has pro­vid­ed $33.6 bil­lion in cap­i­tal to anoth­er 21 banks. So far, the gov­ern­ment has invest­ed $158.6 bil­lion in 30 banks.

Sun­day: The Trea­sury says it will invest $20 bil­lion in Cit­i­group Inc., on top of $25 bil­lion pro­vid­ed Oct. 14. The Trea­sury, Fed and FDIC also pledge to back­stop large loss­es Cit­i­group might absorb on $306 bil­lion in real estate-relat­ed assets.

Tues­day: The Fed says it will pur­chase up to $600 bil­lion more in mort­gage-relat­ed assets and will lend up to $200 bil­lion to the hold­ers of secu­ri­ties backed by var­i­ous types of con­sumer loans. And here is the rest of it.


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