US bailouts of companies during 2008-09

This post will only look at the direct costs related to the USD 606B bailout during 2008-09 financial crisis. So far 40% of this amount has been paid back. Propublica is tracking the repayment of the bailouts (here). Here is a summary of all the bailouts and how much has been repaid.

Type of company	Share of total bailout	Percent of principal    outstanding	Return for subset that repaid bailout in full
Auto company	10%	42%	-
Public bank	38%	4%	14%
Financial services company	4%	61%	11%
Freddie Mac & Fannie Mae	31%	100%	-
Insurance company	12%	0%	8%
Investment Fund	3%	5%	21%
Other	2%	75%	16%

US bailouts during 2008-2009. Calculations based on data from propublica.

Bailouts were given to companies in a liquidity crises but with a sound business strategy, as well as to companies with an unsound business strategy. In a crisis it could make sense to protect companies from a liquidity crisis. This was the case for the public banks, financial services companies, insurance companies, and investment funds, which have mostly repaid the principal. Those that have totally repaid the principal have paid,on average, 13% in compensation to the government (column 3). This is total compensation and should not be compared to a yearly interest rate. Repayment has taken about two years and more for many companies. Given the risk to the tax payer, I think the compensation was too small. It would have been very easy for the government to demand warrants as additional compensation. The government chose not to do so. Furthermore, given that the banks got such a cheap loan, a moral hazard has been created. CEOs are likely to embark on another reckless set of actions within ten years.

Another problem is the companies that were bailed out not just because of liquidity problems but because of a totally flawed business strategy. Most firms making bad business decisions are not in a position to ask the government for a bailout. The only way to get a bailout is to have strong ties to the government. Freddie Mac and Fannie Mae turned out to be two totally unsound companies, but with strong ties to the government. They have not paid anything back of the principal yet, but they have paid a total of 28% for the capital infusion. General Motors and Chrysler also had strong links to the government through the trade unions and state politicians and secured a bailout. Half of the government's capital infusion is still outstanding and it is questionable how much will be repaid in the end. The automotive manufacturers have only paid 5% for the capital infusion.

The takeaway for executives in the finance and old US industries:

• You need to build even stronger networks to politicians. Increase the budget for political campaign donations in the next election. Make it easier for staff to move between good jobs at the US Treasury and the finance industry. Study the French model where the higher echelons move between government and companies more often than in the US.
• However, you also need to be seen as good corporate citizens so engage in more corporate social responsibility activities. This is a cheap way to signal that you are serious and trustworthy, since most people have not (yet) understood that that cheap signals are not worth paying attention to.

My own personal takeaway:

• We know from history and a lot of third world countries that connections to politicians matter. It is sad that the US turned out to be very similar.
• The US government had some decent technocrats that made sure the taxpayer was not totally abused. Most of the bailouts went to companies with sound business strategies. Those companies have repaid the principal with interest. This makes the US different to a banana republic.