Wallstreet Journal plus comments ~ November 13, 2008, 8:39 am

Expanding the $700 Billion Bailout..to $1 Trillion

Posted by Matthew Karnitschnig

As we learned on Tuesday, the Troubled Asset Relief Program isn’t exactly fulfilling the promise of its name.

But according to some influential observers it may not be large enough to fulfill its new function to recapitalize the U.S. banking system.

At a conference sponsored by The Deal in Midtown Manhattan on Tuesday, H. Rodgin Cohen, the chairman of Sullivan & Cromwell, dared utter what he called "the T word," or "trillion."

The $700 billion put into TARP so far is a big number but is beginning to look like little more than the first installment, he said.

Given the considerable leverage weighing on the financial system and the ongoing efforts of many firms to pare down their balance sheets, it would be lucky if the TARP money is enough to maintain stability in the system. If Washington’s goal is to spur lending in order to resuscitate the economy, it will likely have to raise the total to the neighborhood of $1 trillion, according to Mr. Cohen.

A mandarin in the world of banking regulation, Mr. Cohen was involved in nearly every major crisis of the past few months and has the scars to prove it (Bear Stearns, Fannie Mae/Freddie Mac, Lehman Bros., AIG).

His comments were echoed by his partner onstage, Lazard Vice Chairman Gary Parr, himself a sought-after financial consigliere.

Taken together, the comments are probably a pretty good indication that the U.S. taxpayer will have to open his wallet a little wider.

In the grander scheme of things, an extra $300 billion may not seem like that much. If total TARP outlays reach $1 trillion, that would equal about 7% of U.S. GDP. But if you add the other assistance of the recent past - $30 billion for Bear Stearns, $150 billion for AIG, $200 billion for Fannie and Freddie, $245 billion for the commercial paper market and $540 for the money markets - you’re looking at some serious cash.

Comments

You can throw all of the money you want at this problem however as long as Paulson is in charge of it we will never ever see it get corrected. Please remember that he failed the id10t Test......

Comment by Rick - November 13, 2008 at 8:55 am

So the taxpayer gives their money to the banks, so they can loan it back to us, at interest? How do I start one of those businesses?

Comment by Mike - November 13, 2008 at 9:30 am

What is wrong with bankruptcy? This is a time test approach to dealing with these problems. We are starting to see all the companies coming out of the woodwork for the "me too" handouts: the big three, Amex, and God knows who is next. We created a serious moral hazard and we keep feeding it.

Comment by Mike - November 13, 2008 at 9:35 am

everywhere I travel I see Help Wanted signs on store windows..Why is unemployment so high

Comment by bill - November 13, 2008 at 9:45 am

You can’t buy much socialism for $700 billion (even at todays asset prices). $1 trillion is a better starting point. They say the first trillion is the hardest.

Comment by Failed Five-year plans in our Future - November 13, 2008 at 9:54 am

I believe history will record the bail-out as the "Great Tax Payer Ripoff."

Comment by Angus - November 13, 2008 at 10:06 am

LETS NOT LUMP OUR AUTO "INDUSTRY" IN WITH ALL THESE WALL-STREET BAILOUTS !!!!!!!!! HOW MANY COMPANIES HAVE RECEIVED GOVERNMENT FUNDS THAT ACTUALLY MAKE SOMETHING ??????

Comment by MOJAY - November 13, 2008 at 10:08 am

The (union) auto industry makes something no one wants to buy -

Comment by lackeynlovenit - November 13, 2008 at 10:14 am

Wall Street, fine. Auto industry, fine.

Amex is gratuitously unfeeling in their b/s approach to annual charges, fees thereon, late charges unearned. Let ’em rot.

Comment by Ira in L.A. - November 13, 2008 at 10:19 am

So we bail out the banks with money borrowed from China (and others) so they can lend to us so we will buy more stuff made in China so we will run up more debt to stimulate the economy so we can hire more 10.00 per hour WalMart workers to sell us the products made in China so they can lend us more allowing us to test the new paradigme of how does a country that produces nothing generate income long term.

Must be the Great Circle of Life Financial version.

Comment by DG - November 13, 2008 at 10:33 am

Unfortunately, the tarp rationale is morphing from "save western civilization’s financial system" to "corporate welfare to avoid a recession"! It is becoming just another government handout at taxpayers’ expense. We need to impose draconian consequences on any business involved (see aig). That will reduce the demand for this corporate welfare and the market will settle things via the invisible hand (which is not always a kind hand).

Comment by Scarborough investor - November 13, 2008 at 10:46 am

Someone had better plug that "bank holding company" loophole or businesses of every sort will bite off a billion here and a billion there until we’re looking at $2 trillion, maybe $3 trillion. What shall I tell the kids? "Sorry, but your generation is toast."??

Comment by Sam Whitmore - November 13, 2008 at 11:11 am

Wouldn’t it be better if our great and wise government officials would just give each family a million dollars to spend as they please?

The auto industry represents maybe 4% of GDP while Consumers represent 70% of GDP!

Just an idea!

For great trading ideas go to WallStreetMarketNews.com

Comment by Robert - November 13, 2008 at 11:11 am

The scariest thing about Paulson’s change of stance is that it is yet another indication of that he did not know what he was doing!! He is just groping and feeling his way around.

And nobody in a position of power s talking about the credit default swaps which tower over the mortgage defaults in size and complexity. Article today in WSJ barely peels back the mystery a little, http://online.wsj.com/article/SB122654508030023565.html.

Besides, Paulson was an active participant on Wall Street before he became Treasury Secretary. He did not come to the post with clean hands! Did any journalist look into his financial holdings? Or, is he considered so above reproach that he is immune from the human tendency to protect one’s own self interest?

Comment by KKWM - November 13, 2008 at 11:13 am

Is the bailout like providing an antibiotic to an infected patient, or is it more like providing heroin to an addict?

Comment by Larry, Curley, & Moe - November 13, 2008 at 2:24 pm

This ’TRILLION ’Dollar Defecit on a 3.5 Trilloion dollar budget is beyond any of our scopes of imagination. How long would you survive, personally, on $60,000 yr assuming you were issued a CREDIT CARD every year for $20,0000 to help achieve that $60,000?????? God Help Us All!!!

Comment by jrmatps - November 13, 2008 at 2:52 pm

Barack Hussein Obama and John McCommunist both lobbied for this bailout as necessary to save the economy. Well I guess they have been proven 100% wrong. It so sad that our choices were between these two idiots who don’t understand economics. Hussein Obama will continue Bush’s policy of rewarding incompetence with taxpayer money.

Comment by Lou - November 13, 2008 at 3:00 pm

Pardon my dyslexia but this looks like a money TRAP (The Rape At Potomac).

Paulson looks like Daddy Warbucks (check the eyes).

Jobs,Jobs, Jobs would solve all the problems. Saving a dysfunctional Financial System doesn’t make much sense.

Comment by Sugar - November 13, 2008 at 3:06 pm

I’m planning to start a bank holding company. How do I position myself to receive the largest possible handout from the federal government?

I love it how people reflexively blame George W. Bush for all the economic problems today, merely because it’s become fashionable on blogs to do so.

If it were not for Bush’s tax cuts, probably this recession/burst bubble situation inherited from the excesses of the Clinton years would have hit years sooner.

And, of course, Mr. Obama’s promised massive tax increases and redistribution of wealth will turn the recession into a long term depression. The Dems will manage to cling to power, though, by blaming the Republicans for all the problems even 8 years from now.

Comment by Terry Traub - November 13, 2008 at 3:06 pm

From what I’ve been reading, nobody (but the Dems and the recipients) want these bailouts. So how do we, the bill payers, stop it?

Comment by Tim - November 13, 2008 at 3:17 pm

I still can’t get my head around the idea that the Fed somehow coins money from nothing, when it isn’t even Federal and buys stock in financial institutions that are supposed to go to the US gov???

Comment by Rufe - November 13, 2008 at 8:28 pm