The CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped Depositaries Will Cost Zero

So why did Elizabeth Warren lose her battle last month to stop banks from continuing to park $7 trillion notional value of risky derivatives like the credit defaults swaps in taxpayer-backstopped depositaries?

One of the less well-recognized reasons is that the CBO’s dubious analysis said it would not cost taxpayers a dime.

The Congressional Budget Office forecasts have enormous clout on the Hill. Yet as we’ve written, one of its most influential analyses, that of projected Medicare cost increases, was so rancid that two fiscal budgeting experts from the Fed roused themselves to write a lengthy academic paper demolishing it. That CBO work was so problematic on so many fronts, including that it violated CBO policies for the preparation of long-term forecasts in multiple ways, that it raises questions as to the intellectual honesty of the exercise.

In the case of the so-called swaps pushout rule analysis, the CBO came to a similarly dubious conclusion. We’ve embedded a report from the House Committee on Financial Services, which includes the CBO’s budget estimate on pages 5-6. The key bit is that “any impact on the cash flows of the Federal Reserve or the FDIC over the next 10 years would not be significant.” In budgetary terms, that is tantamount to saying it will have no cost.

This is absurd on multiple levels. There is an obvious subsidy to the banks here, otherwise Jamie Dimon would not have been lobbying personally to get the bill passed. FDIC insurance is widely acknowledged by banking experts to be underpriced, so increasing the risk held in depositaries, particularly of positions can and do go boom, makes the odds of going though the FDIC’s kitty even greater.

The CBO attributes no value to the de facto guarantee of these positions, despite the glaring contrary evidence of the $750 billion TARP in 2008 and a bailout of S&Ls in the early 1990s. Do they really have such a good crystal ball that their forecast period will manage to miss entirely one of our periodic banking system implosions? Trust me, if we have a meltdown, these positions will add to the cost. And with the Fed unlikely to be able to end ZIRP any time soon, it have less ability to use monetary tricks to levitate asset prices and thus reduce the fiscal costs of any salvage operation.

A post earlier this week by Occupy Wall Street’s Alternative Banking Group reminds us of how the last bank bailouts similarly undervalued the guarantees:

…even if we accepted the Treasury’s accounting and treated it like just another private trader, its returns are abysmal…it can’t properly count how much aid it gave — and continues to give — these businesses. Beyond the $426 billion of actual capital acquisitions the Treasury made, it provided guarantees and other support to these industries that experts have valued at more like $9 trillion. Calculate the $15 billion profit the Treasury is now bragging about using a $9 trillion base as the money that was put at risk and you start calculating minuscule returns like the 0.1 percent you’d see in a Chase money market.


Let us not forget that Treasury conveniently omits a $35 billion of what Andrew Ross Sorkin called a “a tax benefit, er, gift, from the United States government.” So even on the raw numbers the “TARP made a profit” is questionable. And that’s before you get to three card monte, that the massive, ongoing subsidy to the banks via QE and ZIRP that goosed asset prices was essential to the Treasury being able to exit the TARP at all.

As derivatives expert Satyajit Das observed drily by e-mail:

The cost-benefit rationale is fascinating. I am impressed that people have determined enacting this legislation could affect direct spending and revenues; albeit not significantly. I would have thought not having to potentially bail out a depositary institution would have been a positive to public finances, not a negative. Clearly, I have been misinformed about how cost benefit analysis is done.

It is an Alice in Wonderland view of markets.

CBO swaps forecast

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  1. Jim Haygood


    Quite the opposite. Long-term budgeting never, ever assumes a recession, even though NBER data shows that a recession occurs every five years or so.

    Realistic forecasts would always examine the potential impact of recession and financial stress. But that’s too inconvenient when, as the Financial Report of the United States notes:

    ‘… the Government’s debt-to-GDP ratio is projected to remain flat over the next ten years, and then commence a continuous rise over the remaining projection period and beyond if current policy is kept in place. This trend implies that current policy is not sustainable.’

    When our financial future is too ugly to contemplate, just say ‘Carpe Diem’ three times, assume away the derivatives losses, and have a nice day.

    1. craazyman

      If it gets really expensive, can’t they just pay with The Platinum Coin?

      How much does that cost?

      it can’t cost very much — since it doesn’t even cost 25 cents to make a quarter, does it? If it did, every time they make money they lose money. But more and more money is made. That makes no sense.

      None of this makes any sense.

      1. Clifford Johnson

        In the event of a TARP II, paying with a platinum coin would only half save the taxpayer. There would be still be a massive transfer of wealth to the looted financial sector. Nevertheless, such a payment would represent a significant (and IMHO long overdue) return of monetary authority to the people.

        1. Scott Baker

          Unfortunately, paying the bad gambles off with a TDC or any other kind of bail-out would just encourage bad behavior, as TARP itself has done (TARP is a good term for a program that “covers up” all the stuff you don’t want to see).
          A TDC should only be used for putting money into the real economy, not for paying off the debt (which the banks would fight anyway, since it would be the kind of dilution they prevented when the first United States Notes came out. This, as you know, is the reason why U.S. Notes cannot be used to pay off domestic or foreign debts, but only for personal debts and purchases of government and individuals – which, happily, is exactly what we need).

    2. Alejandro

      ‘Recession’ is when the divergence between “individual/household/small biz” exceeded debt capacity and economic activity becomes obvious. A ‘depression’, and more recently ‘austerity’, is when this is “delusionally” and institutionally denied. Can a debt crisis ever be solved with more debt? Has or can anything “grow” exponentially, in perpetuity?

      Trickle-down, debt peonage and the peed-on(the ‘d’ is silent)…the gold double-standard of golden parachutes and golden showers…the taxpayer as the ultimate risk-taker, who mostly takes it up the…finance as the last battlefield of class-warfare…

  2. Tom Stone

    There’s nothing dubious about this report at all.
    It’s very much like the studies showing the health benefits of smoking tobacco…It may be thin cover for the bureaucrats and politicians, but it is cover.
    And that’s all they need.

  3. fresno dan


    Well, seems to me the same thinking that was espoused by Bernanke, Paulson, and Geithner – of the banks, by the banks, and for the banks of course continues (by the way, I’m using “banks” as a euphemism for the big 5 giant financial institutions). These are people who sincerely believe that the absolute, positively, most important aspect of an economy is fantastically, excessively, outrageously profitable banks, run by people who are excessively, outrageously, fantastically compensated. Therefore, ANYTHING that helps banks helps the US. What’s good for Goldman Sachs is good for the US…

  4. Jim Haygood

    “I’m the most anti-establishment speaker we’ve ever had.” — John Boehner

    Put Boehner together with the most transparent administration in history, and the greening of America is complete!

  5. Watt4Bob

    What bothers me most is the fact that this legislation is obviously intended to protect the big 5 from the effects of the shit-storm they see coming.

    The storm that they are currently busy making inevitable.

    This is obvious because, hind-sight being 20-20, before the last crash, the one they also saw coming even as they were creating it, they outlawed the consumer’s right to relief of credit-card and student loan debt through bankruptcy.

    It’s like the story of the emperor’s new clothes, only in this version the naked emperor isn’t embarrassed, he just keeps walking while the police beat senseless anybody who laughs.

    1. Clifford Johnson

      I see no report to analyze. There’s just a bald statement (without any substantiating data) that no significant tax revenues are expected over the next 10 years. Here’s the core finding, which is a single sentence:
      “Because current law only affects IDIs that are swaps dealers and a small percentage of contracts, CBO estimates that any changes to the net cash flows of either agency would be insignificant for the next 10 years.”

      The reader is referred to CBO staff for details, not to a report.

  6. jo6pac

    This is wonderful and a long with the shift in Pension rules what could possible happen to the shrinking Middle Class. Bye-Bye to us on Main Street.

  7. Bridget

    Puke. This is wrong on so many other levels that it wouldn’t matter if the cost really was zero. Which, of course, it won’t be.

  8. Sustainable Gains

    Pat B, you are exactly right “If the cost is zero, why don’t other banks provide this insurance at low cost?”

    In a normal insurance market, holders of insurance are required to have an insurable interest. For instance, one must own or hold the mortgage on the home being insured. Holders of insurance are also legally prohibited from deliberately triggering the insurance (e.g., must not commit arson on the home).

    Now consider the FDIC insurance of the banks’ derivatives. Isn’t the Federal government effectively telling the banks’ creditors that it’s okay if they burn their own house down? The financial sector is so complicated that banks will eventually come up with a way of triggering the insurance. (It might even be intentional!) As we saw with MBS’s in 2008, the “financial arson” will not be obvious (except to a few experts perhaps) and any accusations of “financial arson” will be deflected with the usual flim-flam. But when it happens, the bankers’ cycle of “privatization of gains, socialization of losses” will be complete yet again.

  9. Ronald Pires

    So why shouldn’t Jamie Dimon be able to buy a number from the CBO just like he buys them from everywhere else? Wanna bet there’ll be a few new job openings on Wall Street being filled by CBO analysts?

  10. Jay M

    fhe thing is the notional is 17 tril
    US GDP 17 tril, global 85 tril.
    Let me leave this comment here

  11. TedWa

    The Fed should have been more concerned with wages keeping up with inflation all these years. Trying to create jobs without increasing wages to keep up with inflation is stealthy stealing and a tax on us all. Whoever gave the Fed the mandate of creating jobs missed that very important point.

  12. kiers

    Well NO WONDER Goldman, JP Morgan, et al RUSHED to become mom-and-pop deposit taking institutions after the crash in 2008! Free capital. Plus it muddled the term “banks” in the mind of the public: “investment banks” (which previously, had *squat* in relation to real economic main street impact) became the “depository banks” mom n pop put their savings into.

    It made the bailout of “banks” SO much more poltically plausible. And now we are seeing the evolution of this idea, applied to stuffing all the derivatives into the mon n pop deposit taking corporate subdivision.

    (anytime you give a corporation…especially a “bank”….money….it has no value whatsoever b/c they’ll always need MORE to make next quarters enhanced earnings estimate). I give Thanks to our esteemed senators and congresspersons.

    G*d help these congressment and senators if the Fed can’t lift off from ZIRP before the next crisis!!!

  13. Clifford Johnson

    Nothing new to shout about here, other than to bemoan the recent passage of the bill. The conclusory CBO “insignificant” “estimates” reproduced in the December 2014 bill were actually issued by the CBO on April 5, 2013. See

    It seems to me that the CBO’s math cannot reasonably be called bad. There is no math to be called bad, as far as I can see. The CBO reports that the “staff contacts for this estimate are Daniel Hoople and Barbara Edwards. The estimate was approved by Theresa Gullo, Deputy Assistant Director for Budget Analysis.” Has anyone taken the trouble to request from these folk their supporting analytic data = numbers? Or is the finding of insignificance “[b]ecause current law only affects IDIs that are swaps dealers and a small percentage of swap contracts” merely some sort of dismissive, off-the-cuff assessment? If the latter, it would surely seem to fall short of statutorily due diligence (per section 402 of the 1974 Congressional Budget Act), in a rather important matter. Could this be an actionable failure to perform a duty…?

    1. Yves Smith Post author

      The financial services industry has been pushing for some time to get this provision passed, and they finally got it through by attaching it to a must-pass budget bill, as I am sure you know. The CBO’s “this costs nothing” was instrumental in getting this done. If they had come up with a meaningful cost, passage would have been more difficult.

      I regard “garbage in, garbage out” exercises as bad math. And the argument that this affects a small percentage of swaps is technically accurate and grossly misleading. A small percentage of a ginormous swaps market is a big number, and the exposures slotted for push-out were the riskiest and hardest to value.

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