Just wanted to pass on this very salient point from Bloomberg columnist Jonathan Weil:
President Barack Obama did Americans a great service yesterday. He boiled down what’s wrong with his administration’s approach to the financial crisis into a single, symbolic statistic.
Striking a hopeful tone during a speech on the first anniversary of Lehman Brothers Holdings Inc.’s collapse, the president said banks have repaid more than $70 billion of taxpayer money that they had accepted from the government. “And in those cases where the government stakes have been sold completely,” he said, “taxpayers have actually earned a 17 percent return on their investment.”
This is the kind of math that helped get Lehman into so much trouble. It’s called cherry-picking.
Let’s be clear: Taxpayers have not earned a 17 percent return on their investment in companies that have accepted federal bailout money. Real-life investors don’t count only their winners. They count their losers, too, including investments that have declined in value and remain unsold.
A few minutes after that bit of bravado, the president identified the “simple principle” in which all his proposed reforms of the financial regulatory system are rooted: “We ought to set clear rules of the road that promote transparency and accountability.” He’s right. We should. A good place to start would be with the people who crunch numbers for the president’s speeches.
Trumpeting the 17% gain on bailout funds returned so far is like saying I invested 90% of my money into a company that’s probably bankrupt, but I must be doing OK because I made a 17% return on the remaining 10%.
3 thoughts on “Reminder: the US has yet to make a profit on its bailout investments”
Adamu, I fail to see where the statement of the 17% return is refuted, or where there is a survivorship bias. Even Weil’s article doesn’t really make it clear. If he were clear, he would have had a number to replace that 17%.
The greater concern is not the return on taxpayer money, in my opinion. It is rather the ability for the FDIC to absorb further regional bank failures without compromising the standards for bank workouts that it has held thus far. The more it seems that the FDIC is running thin on funds to absorb the weekly losses, the more it seems likely that the FDIC will allow private equity firms to purchase banks, on terms favorable to the private equity companies.
I think Adam’s point is that even if they’ve made a 17% profit on the tiny fraction that has been returned so far, they are probably still going to take a severe loss on some of the majority of bailout funds that have yet to be returned. Which is pretty much what everyone expected from the beginning, but all of this crowing about early returns looks to me like a deliberate attempt to confuse the issue.
Spot on Adamu — thanks.
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