Salient to Investors:

Daniel Friedman at UC at Santa Cruz and author Daniel McNeill write:

  • Bailouts suggests to most laypeople gifts to a giant, inefficient, highly connected octopus, but they are typically investments – loans or purchases. The US bailout of Chrysler made a $660 million profit and the nation saved jobs.
  • In August 2007, Joseph Cassano at AIG said: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.” The US bailout of $182.5 billion bought 77.9 percent of AIG stock, and by 2012 had earned all the money back plus a profit of $15 billion plus 16 percent of the company.
  • The Treasury gave the big banks $230 billion from TARP and has received $255 billion, but the smaller banks still owe $15 billion, and overall the public may never get the full $700 billion back from TARP – a cost far less than pundits originally warned.
  • The value of a good credit rating and possibility of a rebound in house prices might make it financially advantageous for underwater homeowners to keep paying on homes worth only slightly less than the value of their mortgage, though at some point it may make bottom-line sense to walk away from the loan.
  • Businesses routinely walk away from contracts when it is more profitable to, and we hear no uproar about it. The law imposes no punitive damages on anyone breaking a contract in most cases. However, while an individual homeowner default here and there does not affect society much, a rash of them does. If foreclosures are nationwide, people’s wealth drops significantly, they can’t get home-equity mortgages, housing prices fall, owners get deeper underwater and default looks more and more appealing.
  • Most underwater homeowners chose not to default, and research suggests that the reasons were mainly moral. At the same time, the federal aid programs had few takers.
  • The financial industry spends more on lobbying and campaign contributions than any other industry except health care, and gets an excellent return on its investment. The industry opposed the mortgage-renegotiation programs, and Geithner did little to get them off the ground.

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