$12.8 trillion -- 90% of GDP! -- to bail out bad bets

Posted Mar 31st 2009 10:30AM by Peter Cohan
Filed under: General Electric (GE), Citigroup Inc. (C), Bank of America (BAC), Federal Natl Mtge (FNM), Amer Intl Group (AIG), Politics, Recession, Financial Crisis

$12.8 trillion of our money is going to bail out the bad bets of bankers, auto execs, and ordinary folks who took on mortgages they couldn't repay over the last 20 months. If you're among the 90% of the country that's been playing by the rules all these years, you may be wondering why that $12.8 trillion should come out of your pocket. After all, doesn't free markets mean that bettors get the pot when they win and pay the piper when they lose?

The "good" news is that of that $12.8 trillion, only a third -- or $4.2 trillion -- has actually been committed to a total of 34 distinct programs. The remaining $8.6 trillion is the limit of how much has been approved. And of that $12.8 trillion, 61% is under the control of the Fed in 20 programs, 16% is in the hands of the FDIC in 5 programs, another 21% will be spent by the Treasury in eight programs and the remaining two percent is being doled out by the Department of Housing and Urban Development (HUD) in one program.

And who are the corporate beneficiaries of all your largess? That would be six of the biggest U.S.-based financial institutions in the world. Here's how much of your money is committed to them:

Fannie Mae/Freddie Mac: $400 billion
Citigroup (NYSE: C): $230.4 billion
General Electric (NYSE: GE): $126 billion
American International Group (NYSE: AIG): $112.5 billion
Bank of America (NYSE: BAC): $89.7 billion

These beneficiaries are just the tip of the iceberg. For example, a German insurer, Allianz, owns PIMCO -- which runs $800 billion in various bond funds -- whose manager Bill Gross made undisclosed profits pushing for the Fannie/Freddie bailout which helped out the value of his GSE bond portfolio. Gross's PIMCO also advises the U.S. on its $251 billion commercial paper program and its $500 billion fund to buy mortgage-backed securities

But here's the big unanswered question: Why is it necessary to put so much taxpayer money at risk? Beyond apocalyptic arguments that remind me of the Iraq mushroom cloud from its non-existent WMDs, I have not heard a convincing reason why this money needed to be spent.

But the reality is that the money is now out there so I think it's time that Americans got an accounting of exactly how that money has been spent and how much of a return us taxpayers have gotten from that investment.

Unfortunately, I would be shocked if anyone actually knows. So forward this to your Congressional representatives and demand the information. If enough of you get the message to Washington, we might just get the answers we deserve.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG, Citi, and GE shares and has no financial interest in the other securities mentioned.

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