MANUEL BALCE CENETA/AP FILE PHOTO

Former U.S. treasury secretary Henry Paulson bore the brunt of Main Street's hostility during protests against his bailout plans, Oct. 2, 2008.

David Olive

What to make of the improbable "news" that U.S. taxpayers are profiting from the biggest government bailout of the financial system in modern times?

That it's not true, even if the New York Times leapt on a report by the U.S. Federal Reserve Board early this week that Uncle Sam has profited to the tune of about $4 billion (U.S.) from federal bailout assistance provided to eight of the largest U.S. banks to fully repay their bailout aid. Which works out to a not-shabby return of 15 per cent on an annualized basis.

"The mere hint of bailout profits," the Times said Monday in a report widely reproduced elsewhere, "has been received as a welcome surprise."

By the Times, perhaps, but not those with their eyes on the bigger picture. Truth is, the catastrophe hatched on Wall Street has cost Americans trillions of dollars, most of which taxpayers never will recover. And highlighting the infrequent bit of good news in what remains a calamity of epic proportions serves only those fighting to preserve the pre-crash status quo on Wall Street.

To start, it's pointless to assess the damage to U.S. taxpayers on the basis of eight of the healthiest banks to receive government aid. America's two most troubled major banks, Citigroup and Bank of America, have yet to repay their bailout funds, and further losses in their portfolios of dubious assets might easily wipe out the ballyhooed $4 billion profit. And there are another 633 U.S. banks that owe the federal government a collective $134.2 billion, with no sense of how much of that will be repaid, either.

What we do know, from a June estimate by Ethisphere, a think-tank that monitors the controversial $700 billion federal Troubled Asset Relief Program launched last October, is that TARP remains $148 billion in the hole.

And TARP is only part of the myriad ways that Washington rushed to the banks' rescue.

There are the trillions of dollars' worth of suspect mortgage-backed securities, many of them notorious "subprime" loans to uncredit-worthy borrowers, that the Fed has bought and taken off the books of otherwise doomed lenders. The U.S. Treasury Department has set aside another $30 billion to induce private-equity firms to buy so-called "toxic assets" from troubled banks.

American taxpayers likely won't ever see again any of the tens of billions of dollars Washington had to spend to effectively nationalize American International Group Inc. (AIG), once the world's largest insurer, which guaranteed subprimes held by scores of global banks. Had the undercapitalized AIG bought the farm, its collapse would have triggered the failure of lenders from San Francisco to Frankfurt to Tokyo.

Uncle Sam further staved off a meltdown of the global financial system with its $95.6 billion nationalization of the cravenly mismanaged Fannie Mae and Freddie Mac, the hybrid private-public firms that are the ultimate buyers of half of all U.S. residential mortgages.

So why was the Fed so eager to feed this trifling good news about the eight recovered banks to the media? Because the bank bailout was sold to a hostile Congress last year by then-treasury secretary Henry Paulson as an investment in rescuing the financial system, with the emergency funds eventually to be recouped.

Even then, most Republicans in Congress were prepared to let the system crash rather than act against their ideological aversion to government intervention in a private-sector economy that had manifestly failed.

"A very dangerous misconception is taking root in the press," says Reuters analyst Rolfe Winkler, "that in addition to saving the world financial system, the bank bailout is making taxpayers money."

Quite the opposite is true, as Main Street understands. The U.S. deficit will soar into the once-unthinkable $9 trillion range over the next few years. That's due mostly to preventing a complete collapse of the world financial system. That and the $787 billion February stimulus package to revive a U.S. economy plunged into recession by a Wall Street-induced global credit crisis.

Still, the good news from the Fed was useful cover for a report later in the week that the top five executives at 10 financial institutions that received some of the largest government bailouts are looking at a windfall stock-market gain of almost $90 million.

Those fortunate few were granted stock options early this year when their banks' shares were flirting with penny-stock status. Thanks to a summer rally in bank stocks, those options to buy bank shares have yielded an effortless bonanza that works out to $1.8 million for each executive.

Wall Street's 20 largest firms have laid off 160,000 employees, foot soldiers in New York's most important economic sector, who have been made to pay for the incompetence and reckless greed of higher-ups. There's no way to justify that ludicrous compensation for the fortunate 50 at firms whose CEOs were paid on average 85 times more than the regulators at the U.S. Securities and Exchange Commission and the Federal Deposit Insurance Corp. who try to protect the system from itself. Even the president of the U.S. gets by on a mere $400,000, and isn't in line for performance or retention bonuses.

Citigroup, in particular, says President Barack Obama's Wall Street "pay czar," Kenneth Feinberg, is fretful about pay restrictions he might impose that could impair Citi's ability to keep top employees. Feinberg appears sympathetic to Citi's quandary. You have to wonder why. Why would Citi want to retain employees who brought the bank to the edge of the abyss? And with Citi on their resumés, who'd hire them if they chose to defect?

This is what enrages Main Street, for good reason. The administration appears sanguine about what FDR referred to as the "malefactors of great wealth." And he seems in no mood to change the amoral "eat what you kill" and outlandish bonus culture by which Wall Street triggered an avoidable global recession worse than any downturn since the Great Depression.

"The (economic) crisis is of historic proportions by many metrics," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, wrote in a recent client note. "Yet in some ways it was not strong enough to force a restructuring of the world economy onto a more balanced track. There will be regulatory adjustments, maybe some coordination and even cooperation. But the failure to take advantage of the crisis to put economies on a more balanced footing will have far-reaching consequences."

Chief among those consequences is "moral hazard," the tendency of people to act recklessly if they know they are protected from damage arising from their carelessness. By bailing out an anti-social financial system without substantive reform, Washington is leaving in place the incentives that will create the next crisis.

Recall that the dot-com and tech crashes that were said to hail a return to sanity occurred just seven years ago. And so soon the financial markets found a new and more powerful way to wreak collateral damage through the global economy.

The only thing that matters, apologists for failing to change the status quo argue, is that the system was saved. Lee Sachs, counsellor to Treasury Secretary Tim Geithner, invokes the MasterCard ad to describe a job well done: "Financial system not going into total abyss: priceless."

Which would be a comforting thought, were there any reason to think calamity – even greater calamity – won't strike yet again seven years from now.