Where did the money go? Misplacing $700 billion is not like losing a $10 bill in your ski jacket, only to find it again the following winter. Yet that's the attitude Timothy Geithner and nearly everyone in the federal government has taken toward the $700 billion in taxpayer money distributed to US banks through the Troubled Asset Relief Program (TARP).

In a recent article he penned, Bill Bonner recounts asking Neil Barofsky, the TARP inspector general from 2008 to 2011, what the banks did with all that money. It was supposed to stimulate the economy, which it did not, so what the heck happened? Well, apparently Barofsky also wanted to know where the money had gone. He mentioned to Bonner: 

“It was amazing to me that no one knew. We gave it to the banks. But no one knew what they did with it. I proposed to Tim Geithner that we find out. He was outraged. He cursed me out, using the F-word. He said it would bring the whole banking system down, if I asked. …

“What did they do with the money? They were supposed to increase lending to help bring about a recovery. None of them did that. Instead, they used it to repay each other's loans. In other words, they used it to reduce the amount of credit available… not increase it. And they bought US agency bonds… just as you'd expect. And they paid out their bonuses.”

Barofsky's comments confirm what most of us already know: the banks used $700 billion in taxpayer money to cover their own hides. And they've done a mighty good job of it. According to a Los Angeles Times article, US banks made a record-setting $40.3 billion in profits during the first quarter of 2013, surpassing the last record set over six years ago. I suspect those record-setting profits funded more than a few sizable bonuses, courtesy of US taxpayers (hey, anything we can do to help pay for their yachts).

Trouble with the Truth

Let me spell out the truth—a concept Geithner has a hard time with:

1.   Banks took $700 billion in bailout money and paid off their high-interest debt. That included FDIC-insured CDs, which they called in, leaving seniors and savers without many viable alternatives for safe investing. 

2.   Banks stopped lending to the public because they found a better deal. If you could take billions of dollars from the government and lend it back to them by buying US bonds, wouldn't you do the same thing? 

3.   Banks turned a big profit and paid out handsome bonuses to their higher-ups. 

4.   By reducing interest rates in the public sector, the Treasury reduced the cost of its own massive debt. For every 1% reduction in interest rates, the government saves over $150 billion annually in interest.

 5.   Politicians love what the Fed is doing. Ten-year Treasuries just moved above a 2% interest rate at the end of May. Higher rates would increase the federal deficit, so Washington wins at the expense of seniors and savers who can no longer count on adequate interest income from safe investments.

Perhaps I am the ultimate cynic; I just want my peers to know that none of this is going to change anytime soon. Even if we manage to elect honest folks with sound judgment, as soon as they arrive in Washington D.C., honesty and good judgment go out the window. That's why we should focus on things we can control, like where we invest our money.

The yield on Treasuries and CDs does not even keep up with inflation, let alone pay enough to supplement our income. Bonds—particularly long-term bonds—come with intrinsic risk in today's low-interest-rate environment; should rates rise, folks who are overallocated in bonds could lose their shirts.

Ask any group of seniors why the stock market is at an all-time high, and they will tell you it's the only place they can find a decent return. Nevertheless, seniors are not the least bit comfortable with the risks that come along with these investments. This predicament is what fuels my mission to educate seniors and other folks planning for retirement. If we have to invest in the market in order to protect our nest eggs, then we need to know how to minimize risks along the way.

I often mention the ROMEO (Retired Old Men Eating Out) Club, a group I belong to that meets every other Tuesday to eat breakfast and solve the world's problems. Had Barofsky come to one of our gatherings, he would have learned what happened to the $700 billion in bailout money before he was done with his first cup of coffee.

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On the Lighter Side

I want to thank everyone who took the time to drop me a note after reading last week's article. It seems to have struck a chord with quite a few folks. A few readers were even kind enough to email suggestions on where to live in Arizona, since I mentioned that my wife Jo and I are planning to move there year-round.

Speaking of Arizona, Tucson is the destination for the next Casey Research Summit. Dr. Ron Paul is the keynote speaker, so if you have not already done so, I encourage you to sign up soon. And if Ron Paul isn't enough of a draw, I'll be there too, so plan to look me up and say hello. I really enjoy meeting and talking with our readers.

Jo and I are back in Florida, sweating it out until then. Frankly, I had forgotten just how hot and humid summers are in this part of the world. We had monsoon-style rain on Independence Day, but several outfits still managed to shoot off fireworks. At least in July all of the snowbirds are up north, which keeps traffic to a minimum.

And finally…

Our customer service team is also headquartered in Arizona. Many of you have likely been in contact with Andrea B., a delightful young lady who handles our customer service duties there. Andrea passed along a few funny lines about retiring in various cities:

You've retired in Phoenix, Arizona if:

  • You are willing to park three blocks away because you found shade.
  • You've experienced condensation on your backside from the hot water in the toilet bowl.
  • You can drive for four hours in one direction and never leave town.
  • You know that “dry heat” is comparable to what hits you in the face when you open your oven door.
  • The four seasons are: tolerable, hot, really hot, and are you kidding me?

You've retired in Florida if:

  • You eat dinner at 3:15 in the afternoon.
  • All purchases include a coupon of some kind—even houses and cars.
  • Everyone can recommend an excellent dermatologist.
  • Road construction never ends anywhere in the state.
  • Cars in front of you often appear to be driven by headless people.

I love the one about the coupons. My mother-in-law was the greatest coupon clipper I have ever seen. I'm just glad the local funeral home didn't offer coupons, or she might have tried to expire before the coupon did.

Until next week…