David R. Francis

The bailout's costs are big – but falling

Washington's bailout of Wall Street will likely cost far less than originally expected.

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    Treasury Secretary Timothy Geithner testifies on Capitol Hill in Washington before the Financial Inquiry Crisis Commission n May 6. Mr. Geithner has estimated the bailout's final cost will be $87 billion after all loans are repaid and government-acquired assets are sold.
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When the risky high-wire acts of Wall Street firms got them into life-threatening danger, Washington spread out a big and expensive safety net.

Some firms failed, but most fell into the net. And, as it turned out, the cost of that bailout net is turning out to be far less than originally feared. This is good news for future federal fiscal deficits.

The real cost of the bailout depends on whom you ask and what you include. Here are some estimates:

$87 billion. That's the estimate by Treasury Secretary Timothy Geithner, who told Congress the bailout's final cost could be that low after repayments and sale of assets that Washington had picked up.

That amount includes the $700 billion Troubled Asset Relief Program (TARP) that Congress approved in October 2008 as well as rescues of Fannie Mae, Freddie Mac, the auto companies, and helping homeowners.

$127 billion. That's the April 20 estimate of the TARP's special inspector general, Neil Barofsky. The losses stem mostly from AIG (the insurance giant), the automakers, and rising home foreclosures. Up to that date, the financial institutions had paid back $186 billion.

That total is far better than the worst-case scenario Mr. Barofsky outlined early in the crisis, when he estimated $21 trillion of taxpayer money was put at risk in the financial bailout when various guarantees were included in the total.

$315 billion. That's the total calculated by ProPublica, a Web-based investigative journalism site. ProPublica looks at not only TARP, but also a host of other programs aimed at alleviating the crisis and recession.

$2 trillion. The Center for Media and Democracy (CMD) estimated last month that federal agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., have disbursed some $4.6 trillion in supporting the financial sector since the meltdown in 2007-08. Some $2 trillion is still outstanding, the CMD estimates.

Since the bailout involves all kinds of loans, some backed by "tons of toxic assets," as the CMD's Mary Bottari puts it, a more precise estimate of costs probably is two or three years away.

Even at $2 trillion, the cost of the bailout would be far smaller than the $21 trillion put at risk. "We are getting better numbers than I expected," says Dean Baker, an economist at the Center for Economic and Policy Research in Washington.

Of course, these bailout costs don't include huge related costs of the financial crisis: 21 million unemployed, millions of them getting unemployment benefits; $9.3 trillion in lost house values; a massive transfer of income from savers to banks because of the Fed's policy of low interest rates on short-term money, etc.

The costs of the rescue make it easier for President Obama to argue for a levy on financial institutions to make up the difference. His fiscal 2011 budget proposes a tax that would bring in $90 billion over 10 years, very close to the $87 billion that Secretary Geithner has estimated the bailout will cost, notes Ms. Bottari. The high taxpayer costs also argue for more transparency.

The Federal Reserve played a primary role in the bailout, Bottari says. It made actual loans of $3.8 trillion and put at risk a maximum of $11.7 trillion. The Fed, she complains, has disclosed little about the collateral the Fed (and taxpayers, in effect) received in return for those loans.

In March, Bloomberg News sued the Fed to make this information public. The suit may be headed for the Supreme Court, Bottari notes.

David R. Francis writes a weekly column.

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