How Did $700 Billion Turn Into $7.7 Trillion?

November 24, 2008 · Posted in Corporate Finance, Government, Rants 

Normally, I have a lot of respect for Bloomberg.com, but their recent article on the US Government’s pledge of 7.7 trillion to ease frozen credit seems a little absurd all things considered.  Their numbers include some of the following expenses:

$3.18 trillion — Already been tapped by banks and other financial institutions

$2.4 trillion — Set aside to buy short-term notes, or commercial paper, that companies use to pay bills

$1.4 trillion — Used by the FDIC to guarantee bank to bank loans

$29 billion — To help with the Bear Stearns takeover by JP Morgan Chase and Co

$123 billion — Bailout for AIG

$306 billion — Guaranteed of CitiGroup debt

$20 Billion — Citibank liquidity loan

$200 billion — Promised to Fannie Mae and Freddie Mac

$139 billion — Loan guarantees for GE’s finance unit

The article continues to talk about how this is the worst crisis to hit America – ever – and that the only difference between this and the great Depression is that now we have these tools – the ability to promote liquidity – even though great risk exists.  They do provide quite a bit of both sides – good and bad – for these programs, but they also leave out some of the fundamentals.  In order for these dollars to be realized:

  1. All the loans and short-term lending would go bad.  All the banks fail without repaying any of the loans.  Collateral becomes value-less and none of the investment is recovered.
  2. All the banks and other companies go under and the preferred stock and investment dollars go bad.  The assets are valueless and no dollars are returned.
  3. All the mortgages owned by all the banks go to zero value.  Houses are determined to be worthless, and no value is returned.

Obviously, it’s impossible to imagine a scenario where every company goes under and every home goes to $0 value, so these numbers aren’t real.  There is, of course, a lot of money spent and a lot of money at risk, but even with some losses it’s equally likely that some of these companies will survive and even prosper, in which case there will be an upside realized by the government.  It’s a waiting game, and frankly I do think that the alternative in some of these cases might be a lot worse.

Would love to hear some other opinions.

Ranter

Tags: , , , , , , , , , , ,

Comments

Leave a Reply