Timeline: The 2008 Financial Crisis, Bailouts, and Repayment

August 2007: Countrywide Financial, one of the least responsible lenders in the country, runs into financial trouble and is rescued by being acquired by Bank of America, which was completed in January 2008. This move was very unfortunate for Bank of America.

November 2007: Charles Prince, CEO of Citigroup, resigns in disgrace after very poor performance of Citi due to excessive exposure to poorly performing subprime loans. He is replaced by Vikram Pandit.

March 2008: Bear Stearns fails and is rescued by JP Morgan Chase with help from the government.

Sept 14, 2008: Merrill Lynch, an investment bank failing due to excessive exposure to subprime loans, agrees to be acquired by Bank of America, a transaction which was completed in January 2009.

Sept 2008: Lehman Brothers is on the verge of bankruptcy. Over the preceding months, several other banks had considered rescuing / acquiring it, but all backed after a closer look, seeing just how bad Lehman’s assets were. The Fed and Treasury try desperately to save it, but they don’t have the legal authority to outright bail it out, and on Sept 15, 2008, Lehman declares bankruptcy.

Late September 2008: After the failure of Lehman, financial panic freezes credit markets. Hank Paulson (Secretary of the Treasury) and Ben Bernanke (Fed Chairman) approach congress asking for permission to use $700-800 billion to bail out the banks. The first question they were asked is “Can’t this wait until after the election?” (the election was scheduled for the beginning of November). Bernanke stresses that credit markets are frozen, banks aren’t lending to each other, let alone anybody else, and normal companies cannot get the routine loans they need to stay in business.

September 29 2008: The House of Representatives rejects the bailout; stock markets crash.

Oct 1, 2008: The Senate passes an amended bailout proposal and the House passes it too on October 3. President Bush immediately signs it into law.

An important feature of the bailouts is that all banks have to be bailed out, whether they need it or not, and whether their management wants it or not. Otherwise those banks that get bailed out could be stigmatized and experience runs. Banks that refuse to take the money are threatened by the government with dire regulatory harassment unless they relent, so that all the banks eventually agree to take the money.

The banks are prohibited from paying back the bailout money until the government gives them permission, and they are prohibited from issuing their employees large bonuses until they pay back the bailout money. Somehow AIG (not a bank) finds a loophole in this and issues large bonuses in spite of still owing a very large amount of TARP money.

In January of 2009, Vikram Pandit, the new CEO of Citi, announces that he will take $1 / year in total compensation until Citi is profitable again. Citi is in extremely bad shape at that time, which was not Pandit’s doing.

In the spring of 2009, the government conducts accounting “stress tests” to see if the banks can weather another storm. Those who pass the stress tests are to be permitted to pay back the bailout money, which most of the big banks do in early June 2009. Citigroup is still in bad shape, and Bank of America also is not fit to repay, mostly due to its unfortunate acquisition of other, far less healthy, banks. Many small banks are struggling and will remain unable to repay the bailout money for years, even until 2016.

The repayment of the TARP money by most of the big banks in June of 2009 gets almost no media attention, being probably the most under covered event of the 21st century.

Later in 2009, the banks that had repaid their TARP money issue bonuses to their employees. It should be noted that under normal conditions, a banker’s bonus is a large part of their routine pay, so not issuing bonuses would be effectively a large pay cut. The public, believing that the TARP money has not been repaid and not understanding the normal nature of bankers’ pay, is enraged.

In September of 2009, “Capitalism: A Love Story”, a Michael Moore movie about the financial crisis, hits the theaters. In it, Michael Moore makes a big act of driving an armored truck around Manhattan to all the big banks demanding that they repay the TARP money. Bankers, knowing that anything intelligent that they say to him will wind up on the cutting room floor, refuse to interview him, and he never gets past the security guards. Whether we should believe that nobody ever told Moore that those banks had already repaid the money is left to the reader.

2011: Ron Paul and Bernie Sanders (a strange pair of bedfellows if ever I saw one) get legislation through congress dictating that the Fed is to be audited. The audit reveals that many short-term secret loans were made by the Fed during the crisis. In early 2009, these loans totaled $1.2 trillion, which was the peak outstanding. This was almost entirely paid back by January of 2010.

Bernie Sanders, on his website, to this date, claims that his Fed audit revealed that $16 trillion in secret loans had happened and makes it sound like none of it has been paid back. To turn $1.2 trillion into $16 trillion, some accounting tricks are done. If I borrow $100 from you Thursday to be paid back in a week, and the next Thursday take out another $100, one-week loan to finance paying the first back, and then repeat the process every week for a year at which point I pay it off, Bernie Sanders’ accounting would call that 52 * $100 == $5200 in loans. But it’s paid back at the end of the year, and it was never more than $100. It was effectively a $100 loan for one year.

Above: the total outstanding debt of the allegedly $16 trillion (actual peak of $1.2 trillion) in loans exposed by the Fed audit.

Most news sources, like Sanders, report the loans as $16 trillion, and insinuate that none of it has been repaid.

2016: All the big banks and AIG have repaid their TARP money long ago.  Some small banks still have yet to pay back.  GM and Chrysler still owe bailout money.

Movie Review: The Big Short

The movie, I felt, was very different from the book, especially the last few minutes of the movie. While the book stressed stupidity and insanity, the movie stressed criminality.

First, prior to the movie, there was some discussion of whether there have been any nationwide crashes in real estate prices since the depression.  I remembered looking at the nationwide Case-Schiller index of home prices, and prior to 2006, we do not see a decrease:

Unfortunately, the Case-Shiller index only goes as far back as 1987, so we don’t have any data prior to that.  The smoothness of the curve, however, is remarkable.  It is easy to see how people as late as 2005 an observer could think that the trend was a very reliable up, up, up.

I don’t think there had been a nationwide drop in real estate prices since the great depression, there had been drops within local markets when local industries got into trouble.  This is why taking a bunch of A and AA bonds from different localities, and bundling them together into a CDO could lead to the CDO legitimately having a better rating than the individual bonds it contained.  A diverse portfolio is less risky than a concentrated portfolio.  The movie basically says this is fraudulent, like using old fish to make a stew so the customers won’t notice that it’s not fresh.  I think the movie was wrong.

At one point, someone sells something for more than it was worth, and someone in the movie said something to the effect that that was criminal.  No, it’s not criminal to sell something for more than it’s worth if you don’t lie in the process.  There’s no law against charging whatever the market will bear.

The movie said that the banks were bailed out and used the bailout money to pay big bonuses.  That’s true of AIG, but not of most of the banks.  Most of the banks paid their bailout money back to the government, with a profit, as soon as they were permitted to, in June of 2009.  One bank that didn’t (because they were in worse shape than the other banks) was Citi, whose CEO, Vikram Pandit, took $1 a year in total compensation until the organization resumed profitability.  This is especially interesting as it was Pandit’s predecessor, not Pandit himself, who made a mess of things at Citi.  AIG did eventually pack back the bailout money.
The repayment of the bailout money was one of the events least-covered by the media, relative to its importance, of the 21st century.  Most Americans just think the banks kept the money and that was the end of it.

Near the end of the movie, someone says the bankers knew they would be bailed out.  I don’t recall that from the book, and it’s inconsistent with most of the movie, which shows the bankers not being aware that a crisis was looming at all.

Many people feel the banks did not suffer at all due to the meltdown.  That’s not accurate, the shareholders  of the badly-managed banks lost most of their investment.  Note that a lot of the management of the banks get paid in stock options, so they lost a lot too.  Here are some plots of stock prices of the various financial organizations: Bailout Statistics