Bank bailout: success comes with ‘moral hazard’

So far, so good. The taxpayers are reaping a nice little profit from the bailout of the banks last fall, according to The New York Times. The paper reports that eight of the biggest banks have fully repaid their bailouts, for a total of $4 billion — or an annual rate of return of 15 percent.

That’s a return Bernie Madoff would have envied.

And a whole lot better than many bailout critics were predicting. (You’d think the Obama administration would be out there trumpeting this success.)

These are early results, of course. Citigroup and Bank of America still haven’t repaid their bailout money; they’ve got a ways to go before their balance sheets look healthy enough for them to do so. Still, the early profits are a lot better than Congress and the Treasury Department dared to hope a year ago, when they launched the bailout of the banks to try to unlock the frozen credit system.

The cloud hovering around this silver lining might be this: Moral hazard. Because former Treasury Secretary Henry Paulson forced shotgun marriages between healthy banks and debt-ridden banks, some of the nation’s financial behemoths are bigger than ever. If they were too big to fail before the bailouts, they are most certainly too big to fail now.

So what’s to keep them from engaging in the same risky financial practices they did before, expecting that the taxpayers will be obligated to bail them out? With the banks swarming Capitol Hill with their lobbyists, is it possible for Congress to pass regulatory reform that will rein in the banks and prevent this kind of catastrophe in the future?

One comment Add your comment


September 1st, 2009
3:29 pm

Right and the “returns” to the taxpayers Cynthia speaks of only means that the governemnt will only need to confiscate $4 billion less for the next bailout. (I haven’t yet received my check for the 15% return, have you?). Time for America to wake up. It’s scary to think how some people buy this administration’s nonsense.