Government Bailout Profit a Myth, Says Merrill Lynch Economist
Politicos and talking heads in the financial media backing the bailout of the financial services industry argue that the government stands to make money on the rescue plan proposed by Treasury Secretary Henry Paulson. But according to a new report, that profit is unlikely.
“And it looks like Washington will be taking an equity stake in any company that takes part in the plan, which means there’s even a chance to make money rather than lose it,” CNBC “Mad Money” host Jim Cramer said on his Sept. 23 show.
But according to a September 2008 report from the International Monetary Fund (IMF), the chances of the government recouping anything more than just a fraction of the bailout costs is unlikely. Alex Patelis, head of international economics at Merrill Lynch, explained the report and cited history as an indicator on CNBC’s Sept. 29 “Squawk on the Street.”
“What you find in the IMF report is of course that banking crises happen all the time,” Patelis said. “If you look at the history of banking crises – that on average they cost about 13 percent of GDP to the government, both in terms of direct recapitalization costs, but also lost revenue.”
If Congress passes the proposal, the government stands to get back just pennies on the dollar of the bailout’s total cost.
“And unfortunately, the average … recouping is about 18 percent of that cost – that is what the government manages to take back in return,” Patelis added. “So the odds are not really in favor of the Treasury making a profit on this top program.”
Opponents of the bailout disagree with the proposal for a myriad of reasons – including the cost and the expansion of government. Former Speaker of the House Newt Gingrich even called for Paulson’s resignation on ABC’s Sept. 28 “This Week with George Stephanopoulos” over the bailout proposal.
“[Y]ou have the former chairman of Goldman Sachs asking for $700 billion,” Gingrich said. “And in his initial request, asking for it in such an un-American way – that I think he should have resigned. I think Paulson has terminally misunderstood the nature of the American system – not just no review, no judicial review, no congressional accountability. ‘Give me $700 billion, $700 billion. I'll be glad to spend it for you.’ That’s a centralization of power that is totally un-American.”