The Tab Is on Us

As most of us know, people have this habit of underestimating the cost of things. Sometimes it's because they don't want to own up to the truth, out of fear, insecurity or ignorance. Or their minds downplay the negatives and emphasize the positives -- whether intentionally or not. Whatever the reasons, it is not uncommon for intial forecasts to be an order of magnitude removed from the final tally. Given that, is it any surprise that government "rescue" efforts that were kicked-started with a $150 billion fiscal stimulus plan now add up, as Forbes notes, to "Washington's $5 Trillion Tab"?

Fighting the financial crisis has put the U.S. on the hook for some $5 trillion a report says. So far.

For all the fury over Treasury Secretary Henry Paulson's $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government's response to the credit crisis.

According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.

The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets.

The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.

The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group (nyse: AIG - news - people ). It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG's residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps.

The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), to the tune of $200 billion.

The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.

Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.

Paulson and Bernanke have tried any number of ways to stop the free fall in housing prices and unfreeze the credit markets, with limited success. Rates that banks charge each other for three-month loans have dropped to 2.1% over the corresponding Treasury security, from their high of 4.8% in October. But lending is contracting as banks brace for rising credit costs and corporate borrowers hunker down.

The Treasury has turned its focus from attempting to buy troubled assets from banks, which was the original intent of the October Emergency Economic Stabilization Act, to injecting capital in the form of preferred equity stakes.

It started out with $125 billion worth of investments in eight major U.S. banks and has since expanded the program to an increasingly broad range of financial and nonfinancial companies. And with just $60 billion left of its initial $350 billion authorization under the emergency act, the Treasury faces a growing number of companies--including Detroit's automakers--begging for assistance.

David Hendler, an analyst at CreditSights, says it looks as if government is left holding the bag, and of course that translates into everyone.

"The losses have to be taken, but no one wants to take them," Hendler said at a conference Wednesday, speaking about the banks and their handling of troubled assets. "It seems like the taxpayers are going to be taking a good portion of that."

Comments

[bobn]

This would be in addition to the $5 Trillion dollars that George W Bush added to the national debt before he started trying to bail his cronies out of the crisis he caused, right?

[Slim Pickins]

Of course the taxpayers are going to take the loss. That was the plan all along. The taxpayer is ignorant. In many cases, he is stoned out of his mind. He spent 12 years in a government school where he didn't learn anything. He mindlessly hands over every last penny he makes to his corporate and public sector masters, saving nothing for himself.

I laugh when I read comments like the previous one from bobn. When you think one political party is at fault, you set yourself up to be fleeced by the other. Yes, Bush has screwed up, but every administration since the end of WWII, both Democrat and Republican, are to blame.

So party on America. Fire up the bong one last time. Rant about the political party you hate from the comfort of your underwater home. Flip me off from behind the wheel of your underwater car. I'm leaving. I'm taking my productive debt free behind and my family's productive debt free behinds and moving off shore. I've had enough of you.

[Tim]

Enjoy yourself Slim and good luck. Just don't go to Iceland. I'm going to stay in the good old USA and drink the bong water.

[MichaelN]

I'm staying in the USA, too.

I must also comment on the anti-Bush remark - BOTH parties are to blame for this fiasco. FNMA and FHMC were run for and by the Democratic party and, last I checked, the Dem's in the House and Senate voted for EVERY Bush spending bill and their ONLY complaint was that he didn't spend enough!

BTW, the Democrats in the Senate ALWAYS had the filibuster if they wanted to stop any of Bush's tax or spending proposals. Did they? Once?

A pox on both parties and in particular people like bobn who is more interested in casting stones than encouraging both parties to be constructive.