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January 17, 2013 
Secrets and Lies of the Bailout 
The federal rescue of Wall Street didn't fix the economy — it 
created a permanent bailout state based on a Ponzi-like 
confidence scheme. And the worst may be yet to come 
by: Matt Taibbi 
It has been four long winters since the federal government, in the hulking, shaven-
skulled, Alien Nation-esque form of then-Treasury Secretary Hank Paulson, 
committed $700 billion in taxpayer money to rescue Wall Street from its own 
chicanery and greed. To listen to the bankers and their allies in Washington tell it, 
you'd think the bailout was the best thing to hit the American economy since the 
invention of the assembly line. Not only did it prevent another Great Depression, 
we've been told, but the money has all been paid back, and the government even made 
a profit. No harm, no foul - right? 
Wrong. 
It was all a lie — one of the biggest and most elaborate falsehoods ever sold to the 
American people. We were told that the taxpayer was stepping in — only temporarily, 
mind you — to prop up the economy and save the world from financial catastrophe. 
What we actually ended up doing was the exact opposite: committing American 
taxpayers to permanent, blind support of an ungovernable, unregulatable, 
hyperconcentrated new financial system that exacerbates the greed and inequality that 
caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to 
increase risk rather than reduce it. The result is one of those deals where one wrong 
decision early on blossoms into a lush nightmare of unintended consequences. We 
thought we were just letting a friend crash at the house for a few days; we ended up 
with a family of hillbillies who moved in forever, sleeping nine to a bed and building 
a meth lab on the front lawn. 
How Wall Street Killed Financial Reform 
But the most appalling part is the lying. The public has been lied to so shamelessly 
and so often in the course of the past four years that the failure to tell the truth to the 
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general populace has become a kind of baked-in, official feature of the financial 
rescue. Money wasn't the only thing the government gave Wall Street — it also 
conferred the right to hide the truth from the rest of us. And it was all done in the 
name of helping regular people and creating jobs. "It is," says former bailout Inspector 
General Neil Barofsky, "the ultimate bait-and-switch." 
The bailout deceptions came early, late and in between. There were lies told in the 
first moments of their inception, and others still being told four years later. The lies, in 
fact, were the most important mechanisms of the bailout. The only reason investors 
haven't run screaming from an obviously corrupt financial marketplace is because the 
government has gone to such extraordinary lengths to sell the narrative that the 
problems of 2008 have been fixed. Investors may not actually believe the lie, but they 
are impressed by how totally committed the government has been, from the very 
beginning, to selling it. 
THEY LIED TO PASS THE BAILOUT 
Today what few remember about the bailouts is that we had to approve them. It 
wasn't like Paulson could just go out and unilaterally commit trillions of public dollars 
to rescue Goldman Sachs and Citigroup from their own stupidity and bad management 
(although the government ended up doing just that, later on). Much as with a 
declaration of war, a similarly extreme and expensive commitment of public 
resources, Paulson needed at least a film of congressional approval. And much like 
the Iraq War resolution, which was only secured after George W. Bush ludicrously 
warned that Saddam was planning to send drones to spray poison over New York 
City, the bailouts were pushed through Congress with a series of threats and promises 
that ranged from the merely ridiculous to the outright deceptive. At one meeting to 
discuss the original bailout bill — at 11 a.m. on September 18th, 2008 — Paulson 
actually told members of Congress that $5.5 trillion in wealth would disappear by 2 
p.m. that day unless the government took immediate action, and that the world 
economy would collapse "within 24 hours." 
To be fair, Paulson started out by trying to tell the truth in his own ham-headed, 
narcissistic way. His first TARP proposal was a three-page absurdity pulled straight 
from a Beavis and Butt-Head episode — it was basically Paulson saying, "Can you, 
like, give me some money?" Sen. Sherrod Brown, a Democrat from Ohio, remembers 
a call with Paulson and Federal Reserve chairman Ben Bernanke. "We need $700 
billion," they told Brown, "and we need it in three days." What's more, the plan 
stipulated, Paulson could spend the money however he pleased, without review "by 
any court of law or any administrative agency." 
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The White House and leaders of both parties actually agreed to this preposterous 
document, but it died in the House when 95 Democrats lined up against it. For an all-
too-rare moment during the Bush administration, something resembling sanity 
prevailed in Washington. 
So Paulson came up with a more convincing lie. On paper, the Emergency Economic 
Stabilization Act of 2008 was simple: Treasury would buy $700 billion of troubled 
mortgages from the banks and then modify them to help struggling homeowners. 
Section 109 of the act, in fact, specifically empowered the Treasury secretary to 
"facilitate loan modifications to prevent avoidable foreclosures." With that promise on 
the table, wary Democrats finally approved the bailout on October 3rd, 2008. "That 
provision," says Barofsky, "is what got the bill passed." 
But within days of passage, the Fed and the Treasury unilaterally decided to abandon 
the planned purchase of toxic assets in favor of direct injections of billions in cash 
into companies like Goldman and Citigroup. Overnight, Section 109 was 
unceremoniously ditched, and what was pitched as a bailout of both banks and 
homeowners instantly became a bank-only operation — marking the first in a long 
series of moves in which bailout officials either casually ignored or openly defied 
their own promises with regard to TARP. 
Congress was furious. "We've been lied to," fumed Rep. David Scott, a Democrat 
from Georgia. Rep. Elijah Cummings, a Democrat from Maryland, raged at 
transparently douchey TARP administrator (and Goldman banker) Neel Kashkari, 
calling him a "chump" for the banks. And the anger was bipartisan: Republican 
senators David Vitter of Louisiana and James Inhofe of Oklahoma were so mad about 
the unilateral changes and lack of oversight that they sponsored a bill in January 2009 
to cancel the remaining $350 billion of TARP. 
So what did bailout officials do? They put together a proposal full of even bigger 
deceptions to get it past Congress a second time. That process began almost exactly 
four years ago — on January 12th and 15th, 2009 — when Larry Summers, the senior 
economic adviser to President-elect Barack Obama, sent a pair of letters to Congress. 
The pudgy, stubbyfingered former World Bank economist, who had been forced out 
as Harvard president for suggesting that women lack a natural aptitude for math and 
science, begged legislators to reject Vitter's bill and leave TARP alone. 
In the letters, Summers laid out a five-point plan in which the bailout was pitched as a 
kind of giant populist program to help ordinary Americans. Obama, Summers vowed, 
would use the money to stimulate bank lending to put people back to work. He even 
went so far as to say that banks would be denied funding unless they agreed to 
"increase lending above baseline levels." He promised that "tough and transparent 
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conditions" would be imposed on bailout recipients, who would not be allowed to use 
bailout funds toward "enriching shareholders or executives." As in the original TARP 
bill, he pledged that bailout money would be used to aid homeowners in foreclosure. 
And lastly, he promised that the bailouts would be temporary — with a "plan for exit of 
government intervention" implemented "as quickly as possible." 
The reassurances worked. Once again, TARP survived in Congress — and once again, 
the bailouts were greenlighted with the aid of Democrats who fell for the old "it'll help 
ordinary people" sales pitch. "I feel like they've given me a lot of commitment on the 
housing front," explained Sen. Mark Begich, a Democrat from Alaska. 
But in the end, almost nothing Summers promised actually materialized. A small slice 
of TARP was earmarked for foreclosure relief, but the resultant aid programs for 
homeowners turned out to be riddled with problems, for the perfectly logical reason 
that none of the bailout's architects gave a shit about them. They were drawn up 
practically overnight and rushed out the door for purely political reasons — to trick 
Congress into handing over tons of instant cash for Wall Street, with no strings 
attached. "Without those assurances, the level of opposition would have remained the 
same," says Rep. Raul Grijalva, a leading progressive who voted against TARP. The 
promise of housing aid, in particular, turned out to be a "paper tiger." 
HAMP, the signature program to aid poor homeowners, was announced by President 
Obama on February 18th, 2009. The move inspired CNBC commentator Rick Santelli 
to go berserk the next day — the infamous viral rant that essentially birthed the Tea 
Party. Reacting to the news that Obama was planning to use bailout funds to help poor 
and (presumably) minority homeowners facing foreclosure, Santelli fumed that the 
president wanted to "subsidize the losers' mortgages" when he should "reward people 
that could carry the water, instead of drink the water." The tirade against "water 
drinkers" led to the sort of spontaneous nationwide protests one might have expected 
months before, when we essentially gave a taxpayer-funded blank check to Gamblers 
Anonymous addicts, the millionaire and billionaire class. 
In fact, the amount of money that eventually got spent on homeowner aid now stands 
as a kind of grotesque joke compared to the Himalayan mountain range of cash that 
got moved onto the balance sheets of the big banks more or less instantly in the first 
months of the bailouts. At the start, $50 billion of TARP funds were earmarked for 
HAMP. In 2010, the size of the program was cut to $30 billion. As of November of 
last year, a mere $4 billion total has been spent for loan modifications and other 
homeowner aid. 
In short, the bailout program designed to help those lazy, job-averse, "water-drinking" 
minority homeowners — the one that gave birth to the Tea Party — turns out to have 
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comprised about one percent of total TARP spending. "It's amazing," says Paul Kiel, 
who monitors bailout spending for ProPublica. "It's probably one of the biggest 
failures of the Obama administration." 
The failure of HAMP underscores another damning truth — that the Bush-Obama 
bailout was as purely bipartisan a program as we've had. Imagine Obama retaining 
Don Rumsfeld as defense secretary and still digging for WMDs in the Iraqi desert four 
years after his election: That's what it was like when he left Tim Geithner, one of the 
chief architects of Bush's bailout, in command of the no-stringsattached rescue four 
years after Bush left office. 
Yet Obama's RAMP program, as lame as it turned out to be, still stands out as one of 
the few pre-bailout promises that was even partially fulfilled. Virtually every other 
promise Summers made in his letters turned out to be total bullshit. And that includes 
maybe the most important promise of all — the pledge to use the bailout money to put 
people back to work. 
THEY LIED ABOUT LENDING 
Once TARP passed, the government quickly began loaning out billions to some 
500 banks that it deemed "healthy" and "viable." A few were cash loans, repayable at 
five percent within the first five years; other deals came due when a bank stock hit a 
predetermined price. As long as banks held TARP money, they were barred from 
paying out big cash bonuses to top executives. 
But even before Summers promised Congress that banks would be required to 
increase lending as a condition for receiving bailout funds, officials had already 
decided not to even ask the banks to use the money to increase lending. In fact, they'd 
decided not to even ask banks to monitor what they did with the bailout money. 
Barofsky, the TARP inspector, asked Treasury to include a requirement forcing 
recipients to explain what they did with the taxpayer money. He was stunned when 
TARP administrator Kashkari rejected his proposal, telling him lenders would walk 
away from the program if they had to deal with too many conditions. "The banks 
won't participate," Kashkari said. 
Barofsky, a former high-level drug prosecutor who was one of the only bailout 
officials who didn't come from Wall Street, didn't buy that cash-desperate banks 
would somehow turn down billions in aid. "It was like they were trembling with fear 
that the banks wouldn't take the money," he says. "I never found that terribly 
convincing." 
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In the end, there was no lending requirement attached to any aspect of the bailout, and 
there never would be. Banks used their hundreds of billions for almost every purpose 
under the sun — everything, that is, but lending to the homeowners and small 
businesses and cities they had destroyed. And one of the most disgusting uses they 
found for all their billions in free government money was to help them earn even more 
free government money. 
To guarantee their soundness, all major banks are required to keep a certain amount of 
reserve cash at the Fed. In years past, that money didn't earn interest, for the logical 
reason that banks shouldn't get paid to stay solvent. But in 2006 — arguing that banks 
were losing profits on cash parked at the Fed — regulators agreed to make small 
interest payments on the money. The move wasn't set to go into effect until 2011, but 
when the crash hit, a section was written into TARP that launched the interest 
payments in October 2008. 
In theory, there should never be much money in such reserve accounts, because any 
halfway-competent bank could make far more money lending the cash out than 
parking it at the Fed, where it earns a measly quarter of a percent. In August 2008, 
before the bailout began, there were just $2 billion in excess reserves at the Fed. But 
by that October, the number had ballooned to $267 billion — and by January 2009, it 
had grown to $843 billion. That means there was suddenly more money sitting 
uselessly in Fed accounts than Congress had approved for either the TARP bailout or 
the much-loathed Obama stimulus. Instead of lending their new cash to struggling 
homeowners and small businesses, as Summers had promised, the banks were literally 
sitting on it. 
Today, excess reserves at the Fed total an astonishing $1.4 trillion."The money is just 
doing nothing," says Nomi Prins, a former Goldman executive who has spent years 
monitoring the distribution of bailout money. 
Nothing, that is, except earning a few crumbs of risk-free interest for the banks. Prins 
estimates that the annual haul in interest on Fed reserves is about $3.6 billion — a 
relatively tiny subsidy in the scheme of things, but one that, ironically, just about 
matches the total amount of bailout money spent on aid to homeowners. Put another 
way, banks are getting paid about as much every year for not lending money as 1 
million Americans received for mortgage modifications and other housing aid in the 
whole of the past four years. 
Moreover, instead of using the bailout money as promised — to jump-start the 
economy — Wall Street used the funds to make the economy more dangerous. From 
the start, taxpayer money was used to subsidize a string of finance mergers, from the 
Chase-Bear Stearns deal to the Wells FargoWachovia merger to Bank of America's 
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acquisition of Merrill Lynch. Aided by bailout funds, being Too Big to Fail was 
suddenly Too Good to Pass Up. 
Other banks found more creative uses for bailout money. In October 2010, Obama 
signed a new bailout bill creating a program called the Small Business Lending Fund, 
in which firms with fewer than $10 billion in assets could apply to share in a pool of 
$4 billion in public money. As it turned out, however, about a third of the 332 
companies that took part in the program used at least some of the money to repay 
their original TARP loans. Small banks that still owed TARP money essentially took 
out cheaper loans from the government to repay their more expensive TARP loans — a 
move that conveniently exempted them from the limits on executive bonuses 
mandated by the bailout. All told, studies show, $2.2 billion of the $4 billion ended up 
being spent not on small-business loans, but on TARP repayment. "It's a bit of a shell 
game," admitted John Schmidt, chief operating officer of Iowa-based Heartland 
Financial, which took $81.7 million from the SBLF and used every penny of it to 
repay TARP. 
Using small-business funds to pay down their own debts, parking huge amounts of 
cash at the Fed in the midst of a stalled economy — it's all just evidence of what most 
Americans know instinctively: that the bailouts didn't result in much new business 
lending. If anything, the bailouts actually hindered lending, as banks became more 
like house pets that grow fat and lazy on two guaranteed meals a day than wild 
animals that have to go out into the jungle and hunt for opportunities in order to eat. 
The Fed's own analysis bears this out: In the first three months of the bailout, as 
taxpayer billions poured in, TARP recipients slowed down lending at a rate more than 
double that of banks that didn't receive TARP funds. The biggest drop in lending — 3.1 
percent — came from the biggest bailout recipient, Citigroup. A year later, the 
inspector general for the bailout found that lending among the nine biggest TARP 
recipients "did not, in fact, increase." The bailout didn't flood the banking system with 
billions in loans for small businesses, as promised. It just flooded the banking system 
with billions for the banks. 
THEY LIED ABOUT THE HEALTH OF THE BANKS 
The main reason banks didn't lend out bailout funds is actually pretty simple: Many 
of them needed the money just to survive. Which leads to another of the bailout's 
broken promises — that taxpayer money would only be handed out to "viable" banks. 
Soon after TARP passed, Paulson and other officials announced the guidelines for 
their unilaterally changed bailout plan. Congress had approved $700 billion to buy up 
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toxic mortgages, but $250 billion of the money was now shifted to direct capital 
injections for banks. (Although Paulson claimed at the time that handing money 
directly to the banks was a faster way to restore market confidence than lending it to 
homeowners, he later confessed that he had been contemplating the direct-cash-
injection plan even before the vote.) This new let's-just-fork-over-cash portion of the 
bailout was called the Capital Purchase Program. Under the CPP, nine of America's 
largest banks — including Citi, Wells Fargo, Goldman, Morgan Stanley, Bank of 
America, State Street and Bank of New York Mellon — received $125 billion, or half 
of the funds being doled out. Since those nine firms accounted for 75 percent of all 
assets held in America's banks — $11 trillion — it made sense they would get the lion's 
share of the money. But in announcing the CPP, Paulson and Co. promised that they 
would only be stuffing cash into "healthy and viable" banks. This, at the core, was the 
entire justification for the bailout: That the huge infusion of taxpayer cash would not 
be used to rescue individual banks, but to kick-start the economy as a whole by 
helping healthy banks start lending again. 
The Scam Wall Street Learned From the Mafia 
This announcement marked the beginning of the legend that certain Wall Street banks 
only took the bailout money because they were forced to — they didn't need all those 
billions, you understand, they just did it for the good of the country. "We did not, at 
that point, need TARP," Chase chief Jamie Dimon later claimed, insisting that he only 
took the money "because we were asked to by the secretary of Treasury." Goldman 
chief Lloyd Blankfein similarly claimed that his bank never needed the money, and 
that he wouldn't have taken it if he'd known it was "this pregnant with potential for 
backlash." A joint statement by Paulson, Bernanke and FDIC chief Sheila Bair praised 
the nine leading banks as "healthy institutions" that were taking the cash only to 
"enhance the overall performance of the U.S. economy." 
But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner 
admitted to Barofsky, the inspector general, that he and his cohorts had picked the 
first nine bailout recipients because of their size, without bothering to assess their 
health and viability. Paulson, meanwhile, later admitted that he had serious concerns 
about at least one of the nine firms he had publicly pronounced healthy. And in 
November 2009, Bernanke gave a closed-door interview to the Financial Crisis 
Inquiry Commission, the body charged with investigating the causes of the economic 
meltdown, in which he admitted that 12 of the 13 most prominent financial companies 
in America were on the brink of failure during the time of the initial bailouts. 
On the inside, at least, almost everyone connected with the bailout knew that the top 
banks were in deep trouble. "It became obvious pretty much as soon as I took the job 
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that these companies weren't really healthy and viable," says Barofsky, who stepped 
down as TARP inspector in 2011. 
This early episode would prove to be a crucial moment in the history of the bailout. It 
set the precedent of the government allowing unhealthy banks to not only call 
themselves healthy, but to get the government to endorse their claims. Projecting an 
image of soundness was, to the government, more important than disclosing the truth. 
Officials like Geithner and Paulson seemed to genuinely believe that the market's 
fears about corruption in the banking system was a bigger problem than the corruption 
itself. Time and again, they justified TARP as a move needed to "bolster confidence" 
in the system — and a key to that effort was keeping the banks' insolvency a secret. In 
doing so, they created a bizarre new two-tiered financial market, divided between 
those who knew the truth about how bad things were and those who did not. 
A month or so after the bailout team called the top nine banks "healthy," it became 
clear that the biggest recipient, Citigroup, had actually flat-lined on the ER table. Only 
weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi — which 
was in the midst of posting a quarterly loss of more than $17 billion — came back 
begging for more. In November 2008, Citi received another $20 billion in cash and 
more than $300 billion in guarantees. 
What's most amazing about this isn't that Citi got so much money, but that 
government-endorsed, fraudulent health ratings magically became part of its bailout. 
The chief financial regulators — the Fed, the FDIC and the Office of the Comptroller 
of the Currency — use a ratings system called CAMELS to measure the fitness of 
institutions. CAMELS stands for Capital, Assets, Management, Earnings, Liquidity 
and Sensitivity to risk, and it rates firms from one to five, with one being the best and 
five the crappiest. In the heat of the crisis, just as Citi was receiving the second of 
what would turn out to be three massive federal bailouts, the bank inexplicably 
enjoyed a three rating — the financial equivalent of a passing grade. In her book, Bull 
by the Horns, then-FDIC chief Sheila Bair recounts expressing astonishment to OCC 
head John Dugan as to why "Citi rated as a CAMELS 3 when it was on the brink of 
failure." Dugan essentially answered that "since the government planned on bailing 
Citi out, the OCC did not plan to change its supervisory rating." Similarly, the FDIC 
ended up granting a "systemic risk exception" to Citi, allowing it access to FDIC-
bailout help even though the agency knew the bank was on the verge of collapse. 
The sweeping impact of these crucial decisions has never been fully appreciated. In 
the years preceding the bailouts, banks like Citi had been perpetuating a kind of fraud 
upon the public by pretending to be far healthier than they really were. In some cases, 
the fraud was outright, as in the case of Lehman Brothers, which was using an arcane 
accounting trick to book tens of billions of loans as revenues each quarter, making it 
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look like it had more cash than it really did. In other cases, the fraud was more 
indirect, as in the case of Citi, which in 2007 paid out the third-highest dividend in 
America — $10.7 billion — despite the fact that it had lost $9.8 billion in the fourth 
quarter of that year alone. The whole financial sector, in fact, had taken on Ponzi-like 
characteristics, as many banks were hugely dependent on a continual influx of new 
money from things like sales of subprime mortgages to cover up massive future 
liabilities from toxic investments that, sooner or later, were going to come to the 
surface. 
Now, instead of using the bailouts as a clear-the-air moment, the government decided 
to double down on such fraud, awarding healthy ratings to these failing banks and 
even twisting its numerical audits and assessments to fit the cooked-up narrative. A 
major component of the original TARP bailout was a promise to ensure "full and 
accurate accounting" by conducting regular "stress tests" of the bailout recipients. 
When Geithner announced his stress-test plan in February 2009, a reporter instantly 
blasted him with an obvious and damning question: Doesn't the fact that you have to 
conduct these tests prove that bank regulators, who should already know plenty about 
banks' solvency, actually have no idea who is solvent and who isn't? 
The government did wind up conducting regular stress tests of all the major bailout 
recipients, but the methodology proved to be such an obvious joke that it was even 
lampooned on Saturday Night Live. (In the skit, Geithner abandons a planned 
numerical score system because it would unfairly penalize bankers who were "not 
good at banking.") In 2009, just after the first round of tests was released, it came out 
that the Fed had allowed banks to literally rejigger the numbers to make their bottom 
lines look better. When the Fed found Bank of America had a $50 billion capital hole, 
for instance, the bank persuaded examiners to cut that number by more than $15 
billion because of what it said were "errors made by examiners in the analysis." 
Citigroup got its number slashed from $35 billion to $5.5 billion when the bank 
pleaded with the Fed to give it credit for "pending transactions." 
Such meaningless parodies of oversight continue to this day. Earlier this year, Regions 
Financial Corp. — a company that had failed to pay back $3.5 billion in TARP loans —
passed its stress test. A subsequent analysis by Bloomberg View found that Regions 
was effectively $525 million in the red. Nonetheless, the bank's CEO proclaimed that 
the stress test "demonstrates the strength of our company." Shortly after the test was 
concluded, the bank issued $900 million in stock and said it planned on using the cash 
to pay back some of the money it had borrowed under TARP. 
This episode underscores a key feature of the bailout: the government's decision to use 
lies as a form of monetary aid. State hands over taxpayer money to functionally 
insolvent bank; state gives regulatory thumbs up to said bank; bank uses that thumbs 
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up to sell stock; bank pays cash back to state. What's critical here is not that investors 
actually buy the Fed's bullshit accounting — all they have to do is believe the 
government will backstop Regions either way, healthy or not. "Clearly, the Fed 
wanted it to attract new investors," observed Bloomberg, "and those who put fresh 
capital into Regions this week believe the government won't let it die." 
Through behavior like this, the government has turned the entire financial system into 
a kind of vast confidence game — a Ponzi-like scam in which the value of just about 
everything in the system is inflated because of the widespread belief that the 
government will step in to prevent losses. Clearly, a government that's already in debt 
over its eyes for the next million years does not have enough capital on hand to rescue 
every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the 
market is behaving as if Daddy will step in to once again pay the rent the next time 
any or all of these kids sets the couch on fire and skips out on his security deposit. Just 
like an actual Ponzi scheme, it works only as long as they don't have to make good on 
all the promises they've made. They're building an economy based not on real 
accounting and real numbers, but on belief. And while the signs of growth and 
recovery in this new faith-based economy may be fake, one aspect of the bailout has 
been consistently concrete: the broken promises over executive pay. 
THEY LIED ABOUT BONUSES 
That executive bonuses on Wall Street were a political hot potato for the bailout's 
architects was obvious from the start. That's why Summers, in saving the bailout from 
the ire of Congress, vowed to "limit executive compensation" and devote public 
money to prevent another financial crisis. And it's true, TARP did bar recipients from 
a whole range of exorbitant pay practices, which is one reason the biggest banks, like 
Goldman Sachs, worked so quickly to repay their TARP loans. 
But there were all sorts of ways around the restrictions. Banks could apply to the Fed 
and other regulators for waivers, which were often approved (one senior FDIC official 
tells me he recommended denying "golden parachute" payments to Citigroup officials, 
only to see them approved by superiors). They could get bailouts through programs 
other than TARP that did not place limits on bonuses. Or they could simply pay 
bonuses not prohibited under TARP. In one of the worst episodes, the notorious 
lenders Fannie Mae and Freddie Mac paid out more than $200 million in bonuses 
between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 
alone, and (b) required nearly $400 billion in federal assistance during the bailout 
period. 
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Even worse was the incredible episode in which bailout recipient AIG paid more than 
$1 million each to 73 employees of AIG Financial Products, the tiny unit widely 
blamed for having destroyed the insurance giant (and perhaps even triggered the 
whole crisis) with its reckless issuance of nearly half a trillion dollars in toxic credit-
default swaps. The "retention bonuses," paid after the bailout, went to 11 employees 
who no longer worked for MG. 
Daily Beast: Don't Blame AIG for Hank Greenberg's Lawsuit 
But all of these "exceptions" to the bonus restrictions are far less infuriating, it turns 
out, than the rule itself. TARP did indeed bar big cash-bonus payouts by firms that 
still owed money to the government. But those firms were allowed to issue extra 
compensation to executives in the form of long-term restricted stock. An independent 
research firm asked to analyze the stock options for The New York Times found that 
the top five executives at each of the 18 biggest bailout recipients received a total of 
$142 million in stocks and options. That's plenty of money all by itself — but thanks in 
large part to the government's overt display of support for those firms, the value of 
those options has soared to $457 million, an average of $4 million per executive. 
In other words, we didn't just allow banks theoretically barred from paying bonuses to 
pay bonuses. We actually allowed them to pay bigger bonuses than they otherwise 
could have. Instead of forcing the firms to reward top executives in cash, we allowed 
them to pay in depressed stock, the value of which we then inflated due to the 
government's implicit endorsement of those firms. 
All of which leads us to the last and most important deception of the bailouts: 
THEY LIED ABOUT THE BAILOUT BEING TEMPORARY 
The bailout ended up being much bigger than anyone expected, expanded far 
beyond TARP to include more obscure (and in some cases far larger) programs with 
names like TALF, TAF, PPIP and TLGP. What's more, some parts of the bailout were 
designed to extend far into the future. Companies like AIG, GM and Citigroup, for 
instance, were given tens of billions of deferred tax assets — allowing them to carry 
losses from 2008 forward to offset future profits and keep future tax bills down. 
Official estimates of the bailout's costs do not include such ongoing giveaways. "This 
is stuff that's never going to appear on any report," says Barofsky. 
Citigroup, all by itself, boasts more than $50 billion in deferred tax credits — which is 
how the firm managed to pay less in taxes in 2011 (it actually received a $144 million 
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credit) than it paid in compensation that year to its since-ousted dingbat CEO, Vikram 
Pandit (who pocketed $14.9 million). The bailout, in short, enabled the very banks 
and financial institutions that cratered the global economy to write off the losses from 
their toxic deals for years to come — further depriving the government of much-needed 
tax revenues it could have used to help homeowners and small businesses who were 
screwed over by the banks in the first place. 
Even worse, the $700 billion in TARP loans ended up being dwarfed by more than 
$7.7 trillion in secret emergency lending that the Fed awarded to Wall Street — loans 
that were only disclosed to the public after Congress forced an extraordinary one-time 
audit of the Federal Reserve. The extent of this "secret bailout" didn't come out until 
November 2011, when Bloomberg Markets, which went to court to win the right to 
publish the data, detailed how the country's biggest firms secretly received trillions in 
near-free money throughout the crisis. 
Goldman Sachs, which had made such a big show of being reluctant about accepting 
$10 billion in TARP money, was quick to cash in on the secret loans being offered by 
the Fed. By the end of 2008, Goldman had snarfed up $34 billion in federal loans -
and it was paying an interest rate of as low as just 0.01 percent for the huge cash 
infusion. Yet that funding was never disclosed to shareholders or taxpayers, a fact 
Goldman confirms. "We did not disclose the amount of our participation in the two 
programs you identify," says Goldman spokesman Michael Duvally. 
Goldman CEO Blankfein later dismissed the importance of the loans, telling the 
Financial Crisis Inquiry Commission that the bank wasn't "relying on those 
mechanisms." But in his book, Bailout, Barofsky says that Paulson told him that he 
believed Morgan Stanley was "just days" from collapse before government 
intervention, while Bernanke later admitted that Goldman would have been the next to 
fall. 
Meanwhile, at the same moment that leading banks were taking trillions in secret 
loans from the Fed, top officials at those firms were buying up stock in their 
companies, privy to insider info that was not available to the public at large. Stephen 
Friedman, a Goldman director who was also chairman of the New York Fed, bought 
more than $4 million of Goldman stock over a five-week period in December 2008 
and January 2009 — years before the extent of the firm's lifeline from the Fed was 
made public. Citigroup CEO Vikram Pandit bought nearly $7 million in Citi stock in 
November 2008, just as his firm was secretly taking out $99.5 billion in Fed loans. 
Jamie Dimon bought more than $11 million in Chase stock in early 2009, at a time 
when his firm was receiving as much as $60 billion in secret Fed loans. When asked 
by Rolling Stone, Chase could not point to any disclosure of the bank's borrowing 
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from the Fed until more than a year later, when Dimon wrote about it in a letter to 
shareholders in March 2010. 
The stock purchases by America's top bankers raise serious questions of insider 
trading. Two former high-ranking financial regulators tell Rolling Stone that the secret 
loans were likely subject to a 1989 guideline, issued by the Securities and Exchange 
Commission in the heat of the savings and loan crisis, which said that financial 
institutions should disclose the "nature, amounts and effects" of any government aid. 
At the end of 2011, in fact, the SEC sent letters to Citigroup, Chase, Goldman Sachs, 
Bank of America and Wells Fargo asking them why they hadn't fully disclosed their 
secret borrowing. All five megabanks essentially replied, to varying degrees of 
absurdity, that their massive borrowing from the Fed was not "material," or that the 
piecemeal disclosure they had engaged in was adequate. Never mind that the law says 
investors have to be informed right away if CEOs like Dimon and Pandit decide to 
give themselves a $10,000 raise. According to the banks, it's none of your business if 
those same CEOs are making use of a secret $50 billion charge card from the Fed. 
The implications here go far beyond the question of whether Dimon and Co. 
committed insider trading by buying and selling stock while they had access to 
material nonpublic information about the bailouts. The broader and more pressing 
concern is the clear implication that by failing to act, federal regulators have tacitly 
approved the nondisclosure. Instead of trusting the markets to do the right thing when 
provided with accurate information, the government has instead channeled Jack 
Nicholson — and decided that the public just can't handle the truth. 
All of this — the willingness to call dying banks healthy, the sham stress tests, the 
failure to enforce bonus rules, the seeming indifference to public disclosure, not to 
mention the shocking lack of criminal investigations into fraud committed by bailout 
recipients before the crash — comprised the largest and most valuable bailout of all. 
Brick by brick, statement by reassuring statement, bailout officials have spent years 
building the government's great Implicit Guarantee to the biggest companies on Wall 
Street: We will be there for you, always, no matter how much you screw up. We will 
lie for you and let you get away with just about anything. We will make this ongoing 
bailout a pervasive and permanent part of the financial system. And most important of 
all, we will publicly commit to this policy, being so obvious about it that the markets 
will be able to put an exact price tag on the value of our preferential treatment. 
The first independent study that attempted to put a numerical value on the Implicit 
Guarantee popped up about a year after the crash, in September 2009, when Dean 
Baker and Travis McArthur of the Center for Economic and Policy Research 
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published a paper called "The Value of the Too Big to Fail' Big Bank Subsidy." 
Baker and McArthur found that prior to the last quarter of 2007, just before the start 
of the crisis, financial firms with $100 billion or more in assets were paying on 
average about 0.29 percent less to borrow money than smaller firms. 
By the second quarter of 2009, however, once the bailouts were in full swing, that 
spread had widened to 0.78 percent. The conclusion was simple: Lenders were about a 
half a point more willing to lend to a bank with implied government backing — even a 
proven-stupid bank — than they were to lend to companies who "must borrow based 
on their own credit worthiness." The economists estimated that the lending gap 
amounted to an annual subsidy of $34 billion a year to the nation's 18 biggest banks. 
Today the borrowing advantage of a big bank remains almost exactly what it was 
three years ago — about 50 basis points, or half a percent. "These megabanks still 
receive subsidies in the sense that they can borrow on the capital markets at a discount 
rate of 50 or 70 points because of the implicit view that these banks are Too Big to 
Fail," says Sen. Brown. 
Why does the market believe that? Because the officials who administered the 
bailouts made that point explicitly, over and over again. When Geithner announced 
the implementation of the stress tests in 2009, for instance, he declared that banks who 
didn't have enough money to pass the test could get it from the government. "We're 
going to help this process by providing a new program of capital support for those 
institutions that need it," Geithner said. The message, says Barofsky, was clear: "If the 
banks cannot raise capital, we will do it for them." It was an Implicit Guarantee that 
the banks would not be allowed to fail — a point that Geithner and other officials 
repeatedly stressed over the years. "The markets took all those little comments by 
Geithner as a clue that the government is looking out for them," says Baker. That 
psychological signaling, he concludes, is responsible for the crucial half-point 
borrowing spread. 
The inherent advantage of bigger banks — the permanent, ongoing bailout they are still 
receiving from the government — has led to a host of gruesome consequences. All the 
big banks have paid back their TARP loans, while more than 300 smaller firms are 
still struggling to repay their bailout debts. Even worse, the big banks, instead of 
breaking down into manageable parts and becoming more efficient, have grown even 
bigger and more unmanageable, making the economy far more concentrated and 
dangerous than it was before. America's six largest banks — Bank of America, JP 
Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — now 
have a combined 14,420 subsidiaries, making them so big as to be effectively beyond 
regulation. A recent study by the Kansas City Fed found that it would take 70,000 
examiners to inspect such trillion-dollar banks with the same level of attention 
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normally given to a community bank. "The complexity is so overwhelming that no 
regulator can follow it well enough to regulate the way we need to," says Sen. Brown, 
who is drafting a bill to break up the megabanks. 
Worst of all, the Implicit Guarantee has led to a dangerous shift in banking behavior. 
With an apparently endless stream of free or almost-free money available to banks —
coupled with a well-founded feeling among bankers that the government will back 
them up if anything goes wrong — banks have made a dramatic move into riskier and 
more speculative investments, including everything from high-risk corporate bonds to 
mortgagebacked securities to payday loans, the sleaziest and most disreputable end of 
the financial system. In 2011, banks increased their investments in junk-rated 
companies by 74 percent, and began systematically easing their lending standards in 
search of more high-yield customers to lend to. 
This is a virtual repeat of the financial crisis, in which a wave of greed caused bankers 
to recklessly chase yield everywhere, to the point where lowering lending standards 
became the norm. Now the government, with its Implicit Guarantee, is causing 
exactly the same behavior — meaning the bailouts have brought us right back to where 
we started. "Government intervention," says Klaus Schaeck, an expert on bailouts 
who has served as a World Bank consultant, "has definitely resulted in increased 
risk." 
And while the economy still mostly sucks overall, there's never been a better time to 
be a Too Big to Fail bank. Wells Fargo reported a third-quarter profit of nearly $5 
billion last year, while JP Morgan Chase pocketed $5.3 billion — roughly double what 
both banks earned in the third quarter of 2006, at the height of the mortgage bubble. 
As the driver of their success, both banks cite strong performance in — you guessed it 
— the mortgage market. 
So what exactly did the bailout accomplish? It built a banking system that 
discriminates against community banks, makes Too Big to Fail banks even Too 
Bigger to Failier, increases risk, discourages sound business lending and punishes 
savings by making it even easier and more profitable to chase high-yield investments 
than to compete for small depositors. The bailout has also made lying on behalf of our 
biggest and most corrupt banks the official policy of the United States government. 
And if any one of those banks fails, it will cause another financial crisis, meaning 
we're essentially wedded to that policy for the rest of eternity — or at least until the 
markets call our bluff, which could happen any minute now. 
Other than that, the bailout was a smashing success. 
***** 
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