Bailout Cost, per Taxpayer, by Income
The bailout of Wall Street may not have ultimate costs as high as the nominal bailout amount, but the interest payments on the debt will come due immediately, and the recoveries from Wall Street, if any, will take many years.
The impact of the bailout which will surely happen in one form or the other, will impact taxes, interest rates, the exchange rate of the Dollar, imports and exports, foreign direct investment both in and out of the US, corporate sales and profits, and a long list of economic and investment dimensions too long to mention and to unknowable to predict.
You can bet that your investments will be heavily impacted — fixed income (proxies AGG and IEF), domestic equities (proxies SPY and VTI), international equities (proxies EFA and EEM), real estate (proxy VNQ), commodities (proxies DJP, USO and GLD), currencies (proxies UUP and UDN) and other types of investments will all be impacted.
It’s too soon for us to come up with investment or disinvestment recommendations we’re willing to publish. However, one big factor in how things play out is the size of the tab for the bailout on a per investor basis.
We’ve noodled some costs we’d like to share with you here.
Per Taxpayer Annual Costs:
Who will pay how much and for how long for the bailout?
With the assumptions below, how much would taxpayers in each bracket have to pay per year for 30 years to support the debt service on the bonds issued for the bailout, assuming 30-year amortization of a sinking fund?
- if the total bailout is $1 trillion (the prior $300 billion already paid out, plus the $700 billion proposed to be paid out),
- and if the money is borrowed by the US using 30-year Treasury bonds,
- and if the interest rate is the 4.13% rate for 30-yr bonds today
- and if taxpayers are burdened to the same degree that they currently pay taxes
- then WOW!
The annual cost per average taxpayer is $439, but the distribution among income segments is tremendously skewed.
The bill for the top 1% of taxpayers is a shocking $173,000 per year. The annual bill for the bottom 50% of taxpayers is an easy $27. The image below shows the annual cost for the following income segments of taxpayers based on 2005 tax demographics from the IRS:
- top 1%,
- top 5%,
- top 10%,
- top 25%,
- top 50%
- bottom 50%.
Good luck to us all.
P.S. We don’t know all the history behind mark-to-market accounting rules, but wouldn’t temporarily creating more asset valuation flexibility in this locked-up credit market improve capital ratios and reduce the capital infusion requirements, reducing the size of the needed bailout, and grease the wheels of credit a bit?
Recording assets at cost can be a fiction, but under extreme conditions such as we have today, recording assets at “market” can also be a fiction.
Mark-to-market becomes fictional when the bids and bid sizes are so low that the assets can’t or won’t be sold. Mark-to-market is based on the assumption of a functioning market, which we do not have at this point.
There is a fundamental difference between loss of worth and loss of liquidity.
At this point, government talk without action may be making markets less liquid.
If a bank holds assets with low bids and has the expectation that the government may agree to buy those assets at a higher price, the bank will delay sales to wait for the higher government bid. In effect, the government, not the banks, may be causing the credit market liquidity problems by promising but not delivering relief.
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This article has 21 comments:
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Owen
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138 Comments
Oct 01 01:43 PMThis article is riddled with inaccuracies and misleading statements.
Firstly, the 'bailout package' is an acquisition by the Treasury of one trillion dollars' worth of low-grade securities. The final net cost will be one trillion dollars only in the highly unlikely event that the securities bought are not worth a single penny. The previous US banking bailout returned about 75 cents on the dollar. If this is the case now, the actual cost will be $250 billion. Remember, AIG alone, now owned by the Fed, is worth around $200 billion under normal circumstances. There's no reason to think it can't be spun off in the future for a similar amount.
Secondly, you seem to have forgotten that the largest taxpayers in America are corporations, both domestic and arms of foreign companies. Accounting for those changes the numbers dramatically.
Thirdly, the top 5% of taxpayers make the bulk of their income from investments. They are, in fact, pushing to get this deal done, as it would save them far more than it costs. The rest of the taxpayers also make a significant portion of their earning from investments, be it their pension or their employer's profit sharing plan, but they may not realize that's the case.
Like you, I also have my doubts about this bailout package, but it is important we present the facts truthfully.
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phdinsuntanning
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433 Comments
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Oct 01 01:46 PM-
phdinsuntanning
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433 Comments
My Website
Oct 01 01:48 PM-
Owen
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138 Comments
Oct 01 01:51 PMThe question of total cost is relevant and important, but the issue of coupon rates and dates is pointless.
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Whidbey
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782 Comments
Oct 01 01:54 PM-
Don R
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1 Comment
Oct 01 02:07 PM1) The institutions eligible for aid are anyone other than a foreign central or entity owned by a foreign government. (check how the term "financial institution" is defined)
2) Troubled assets eligible for purchase can be anything and anywhere. There is no restriction to domestic mortage backed securities. (check how the term "troubled assets" is defined.
3) The $700 Billion limit is a line of credit limit, not a cap on the amount of assets that can be purchased. The treasury can sell assets for 90 cents on the dollar and still consume the full $700 Billion, as long as it does not own more than $700 Billion of assets at one time. (check the
authorized increase in national debt to get an idea of the real exposure.)
I cannot stress strongly enough that it is important to read the actual 106 page document, and not rely on second hand interpretations. Pay particular attention to the definitions section.
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GMiki
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325 Comments
Oct 01 02:24 PMPrice inflation will grow to a painful extent as money/debt inflates and this definitely will inflict great harm on the bottom income group.
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Smarty_Pants
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1105 Comments
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Oct 01 02:44 PM1040-TARP
1) Write down your income: $____________
2) Send it in.
Make checks payable to the US Treasury.
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JasonC
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366 Comments
Oct 01 03:16 PMTherefore, the only question and I mean the only question on the cost of this policy is whether it will raise or lower future GDP. If it will raise it, it will pay for itself many times over. If not, it will cost something.
But a very modest something. Our actual collective wealth is not the money lying around, or the inventories, or even all assets at their current prices, let alone the prices they would fetch in a general deflationary smash. Instead, it is our entire future income stream, also known as the economy. Which is $14.3 trillion a year and rising 6-7% a year forever.
Nobody debating the subject is remotely sane or thinking like an economist, and it show. One entry accounting and tendentious spin is all you see.
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Owen
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138 Comments
Oct 01 03:31 PMOn Oct 01 03:16 PM JasonC wrote:
> The UST collects 20% of national income regardless of policies, tax,
> spending, funding, investment, any of it. That is the econometric
> reality.
>
> Therefore, the only question and I mean the only question on the
> cost of this policy is whether it will raise or lower future GDP.
> If it will raise it, it will pay for itself many times over. If
> not, it will cost something.
>
> But a very modest something. Our actual collective wealth is not
> the money lying around, or the inventories, or even all assets at
> their current prices, let alone the prices they would fetch in a
> general deflationary smash. Instead, it is our entire future income
> stream, also known as the economy. Which is $14.3 trillion a year
> and rising 6-7% a year forever.
>
> Nobody debating the subject is remotely sane or thinking like an
> economist, and it show. One entry accounting and tendentious spin
> is all you see.
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Socialism cannot compete!
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475 Comments
Oct 01 03:52 PMAbsolutely correct!! We leveraged this stuff up with more flexible models of valuing it...we cannot deleverage it with a strict mark-to-market model, without taking a huge hit. The hit will be hardest upon the buyer who gets in while the market is least functional and therefore paying worst-possible-case prices...and that stands to be the U.S. government! (i.e. taxpayers)
Just Say No to the "bailout."
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iThinkBig
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1039 Comments
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Oct 01 03:52 PMYes, we'll move on and grow the economy yet again. But are we still a $14 T economy? I don't think you or I could answer that at this time.
Will we grow 6-7% a at some point, sure. But your information is providing false hope for investors and citizens alike.
Here is my advice since 2007 which has remained consistent and has been accurate as all can click on my screen name and see since then: We are going into a depression. Our 25 year economic model has failed. Inside greed from Washington and Banking accelerated this process.
Prepare for a Depression. Plenty of ways to make money and buy up great assets cheap during one. People will become fabulously wealthy or fabulously poor in short spans.
The start of the next sustained stock market and Bull will be 2013. I can click on your comments Jason C and see many, many incorrect forecasts. But on financial knowledge you are very bright in general, just over-optimistic about the short and mid-term.
Hey, I want it to be wonderful too, but I am a realist not a cheerleader and as such I have a responsibility to advise those I care for about the realities I mentioned. Much of it is simple common sense and fundamentals.
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Smarty_Pants
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1105 Comments
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Oct 01 04:00 PMToo bad the world is going to end on December 21, 2012, per the Mayan Calendar. We'll never see the start of the next bull market. :-)
Seriously though, you're right. Things will get worse before they get better. ARM resets will continue until at least 2010 and foreclosures will follow the resets. Housing prices will continue down until the excess inventory clears. New building will slow to a crawl and economic activity with it. Hunkerdown and look for bargain basement prices on things of value to build your net worth on. Until then, protect your savings and add to them every chance you get.
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JasonC
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366 Comments
Oct 01 05:06 PMThe market dropped 777 points on Monday. But the same index was *worth* 777 points at the 1982 low, 26 years ago. In 26 years, a day's hard fluctuation is the size the whole market was then.
The permabears will be screaming "doom, doom" when the market drops 10,000 points in one day, 26 years from now. All the way down to 175,000.
Perhaps it won't be quite that good, and perhaps it will meander around for 5 years before taking off again. Or perhaps it will take off within 6 months after a bailout bill passes. Nobody knows, and I for one don't much care. As long as we don't deliberately nuke the golden goose that is our financial system, a generation from now every doom mongering short today, will look as dumb as the doom mongering shorts of 1982. Who all said that recession was Hoover all over again and Reagan was a dunce, etc, etc.
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Mr MarkToMarket
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3 Comments
Oct 01 05:17 PM-
kurt walter
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409 Comments
Oct 01 08:31 PM-
BrunoT
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70 Comments
Oct 01 10:27 PMInteresting point. But did you stop to realize that aggregate GDP is not spread uniformly? What if most of the gains/benefits accrue to the top 5% (those who own stocks of these companies and others) yet the bonds are repaid by a broader spectrum? (those who consume most of their income)
And more things come to mind that should be considered. What of the costs of inflation caused by injecting dollars into the economy, which is born more heavily by "working class" people, as the costs of necessities is a higher percentage of their income. And what of the intangible costs of the moral hazard created? Put a value on that one! And from what I'm reading $700B is not the end of it. What happens when CDS and credit card and auto loans are added to bailouts? Where does it end? And once we're in for $700B, there would be severe pressure to "protect our investment" with further cash outlays.
I think the calculations required here are beyond any one page column.
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phdinsuntanning
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433 Comments
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Oct 02 07:07 AM-
Atlas Shrugged
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1 Comment
Oct 02 12:05 PM-
Smarty_Pants
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1105 Comments
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Oct 02 02:17 PMThree cases:
A) Treasury buys toxic securities at original values - original owner avoids losses, taxpayers take them.
B) Treasury buys toxic securities at true value - original owner forced to realize the loss NOW, taxpayer avoids loss.
C) Treasury buys toxic securities between full value and true value - original owner forced to realize partial losses NOW, taxpayer gets partial losses.
No matter what, any schedule 3 asset that is not bought at full value will put an immediate loss in the company's bottom line (which is the fact we're trying to avoid right?). This still leaves the original owner with the same problem NOW instead of later.
Any other option requires the taxpayer to take the hit instead. Blather about "holding until profitable" is just that, Blather. If that were truly the case, Warren Buffett would be buying level 3 assets instead of loaning money to Goldman and GE at 10% interest with warrants.
The reason Warren Buffett isn't buying toxic assets is that there's no way to make money on them without risking a huge loss.
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Owen
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138 Comments
Oct 02 06:24 PMHowever, keep in mind that most of the losses have already been accounted for due to mark-to-market principles, so anything paid above market value will appear as a profit on the next quarterly report for the company.
Also, normal supply and demand rules still apply, so when the Treasury starts buying $850B of these toxic assets at market price, this market price will rise sharply.
On Oct 02 02:17 PM Smarty_Pants wrote:
> Purchasing bad debt won't eliminate the losses that it represents.
> At best it will transfer them.
>
> Three cases:
>
> A) Treasury buys toxic securities at original values - original owner
> avoids losses, taxpayers take them.
>
> B) Treasury buys toxic securities at true value - original owner
> forced to realize the loss NOW, taxpayer avoids loss.
>
> C) Treasury buys toxic securities between full value and true value
> - original owner forced to realize partial losses NOW, taxpayer gets
> partial losses.
>
> No matter what, any schedule 3 asset that is not bought at full value
> will put an immediate loss in the company's bottom line (which is
> the fact we're trying to avoid right?). This still leaves the original
> owner with the same problem NOW instead of later.
>
> Any other option requires the taxpayer to take the hit instead.
> Blather about "holding until profitable" is just that, Blather.
> If that were truly the case, Warren Buffett would be buying level
> 3 assets instead of loaning money to Goldman and GE at 10% interest
> with warrants.
>
> The reason Warren Buffett isn't buying toxic assets is that there's
> no way to make money on them without risking a huge loss.