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More Billions and Trillions

A recent essay of mine on the creation, management, and spending of billions and trillions of dollars, a practice quite common in contemporary life, prompted a lively reaction and deserves a follow-up. Here are more data and commentary that should provide perspective and raise interesting questions.

1. By the end of 2007, the nation’s health care bill was some $2 trillion a year, or 16% of the U.S. economy. Government is already paying 47% of it. All of the major party presidential candidates of both parties are proposing, in one way or another, that government assume more of the burden. Leading Democrats advocate increasing taxpayer spending by around $100 billion a year, largely to help people purchase private insurance plans. Is this a march toward socialized medicine, a system run by the same people who operate our postal service? Is it a boondoggle for the insurance industry, eager for mandatory insurance laws? Or is the campaign issue solely about getting more votes? Let us ask how many Americans are currently unable to obtain medical assistance? While we’re at it, how many illegal immigrants are turned away from hospitals?

2. Two privately operated but government sponsored mortgage companies, Fannie Mae and Freddie Mac, are in the business of providing guarantees on mortgage-backed securities held by others. Together they own or guarantee a combined $4.8 trillion of U.S. home mortgages, about 45% of the total outstanding, and rising. Fannie reported recently that its income for the past nine months sank to $1.51 billion from $3.46 billion a year earlier, in large part because of the wave of defaults and foreclosures resulting from the subprime mortgage fiasco. Freddie reported a third quarter loss of $2.03 billion, and its core capital is only slightly above the minimum required by regulators. Stocks in both companies have plummeted to a ten year low. (The total compensation for the Freddie CEO was $14.7 million last year.) The Wall Street Journal commented editorially, “If these two mortgage giants get into trouble, the people stuck with rescuing them will be the taxpayers. See also Peter J. Wallison, “Don’t Bail Out Fannie and Freddie,” Wall Street Journal, November 29, 2007.

3. And then there are the twelve Federal Home Loan Banks, privately owned and chartered by Congress. Since they were created in 1932, the banks have prospered because of the widespread belief that government would bail them out if things went bad. The Atlanta bank has loaned the Countrywide Financial Corporation $51.1 billion as of September 30, up 77% from three months earlier. Countrywide, deeply involved in the subprime mess, is using mortgages to secure the loan, which has raised many questions among investors, economists, and politicians. Citigroup, Inc. and Washington Mutual, Inc. have borrowed more from the home loan banks than Countrywide.

4. And then the Treasury Department came to the aid of the banks and mortgage companies by forging a plan helping to freeze subprime mortgage adjustments for millions of consumers, living beyond their means. Stock prices in the industry climbed immediately. Free enterprise, anyone?

5. Amid all the financial turmoil, the top five investment banks this year had revenue of $132 billion. Bonuses in these banks could reach $40 billion, up from $36 billion last year. A single bank, Goldman Sachs Group, may pay out $22 billion. Nice work if you can get it. And let us not forget Stan O’Neal, who presided over Merrill Lynch’s $8.4 billion write-down of securities backed by subprime mortgages. When he was dismissed earlier this year, he received a pay package totaling $162 million. A family could live on that for awhile.

6. The tiny, oil-rich nation of Dubai, part of the United Arab Emirates, spent $28.7 billion on new jetliners last month. Government-owned DP World recently raised $4.96 billion in a public offering, raising its assets to $21.6 billion. Two other companies in the UAE are larger. Meanwhile, inflation in the UAE is soaring: ll.8% last year, and an estimated 12% this year. In Dubai, foreign construction workers and others have staged sometimes violent protests about their decreased buying power. UAE rulers are considering a minimum wage.

7. How big are the world’s hedge funds? The estimates of their market size, according to the Wall Street Journal, is between $1.25 trillion and $2.48 trillion.

8. A single British bank, HSBC Holdings, has assets of $2.15 trillion. This year companies from the United Kingdom have struck $46 billion of acquisition deals in the United States, compared with $34 billion in all of 2006.

9. Five pension funds, in New York, Texas, and Florida, control more than $500 billion in assets.

10. Two Indian entrepreneurs, Anil and Mukesh Ambani, are worth close to $100 billion. Stock in their huge corporations has suddenly began to leap, prompting speculation that the Ambanis are manipulating prices in order to attract more international investors and to cash in on a major purchase being pondered by an American corporation. Some people, on all socio-economic levels, never have enough money. Pity them.