The risk was incredibly low. The banks were rather profitable, but they had cash flow issues from deleveraging. And credit vanished in 2008.
For the government's balance sheet, getting paid back 8.6% is a lot more reliable than your gut instinct of infrastructure or education or (especially!) health care.
If the risk was so low, why couldn't a private entity bail out the banks? Would have been a gangbusters investment, right? 8.6% is a good return for that risk?
How many entities do you know with almost 700bn in the bank ?
The point of the bailout was to throw all the might of the State behind the sector, in a "ye shall not pass" stance that basically stated that either we cut these banks some slack or our current civilization would burn in flames.
It worked, because people got the message and business eventually went back to normal. We can disagree on whether it was "good enough" (I thought the opportunity for deeper changes was ripe, but I'm just an old-school eurosocialist myself), but I don't think any other entity could have done it except Nation-States.
>How many entities do you know with almost 700bn in the bank?
None but no single institution needed that much. Private investors, especially when working together, could have certainly stumped up funds for individual institutions. In fact, in the case of AIG such an overture by Chinese investors was rejected: http://www.nakedcapitalism.com/2014/10/aig-bailout-trial-bom...
That's not "private investors", that's the Chinese government. This would have had clear political implication (the Chinese already hold a lot of US debt etc etc), but regardless, it was Nation-States making moves -- basically the only players in the game, on that size of petty cash.
> or our current civilization would burn in flames.
Wait a minute, just a minute. The way I see it, the US government didn't disarm a nuclear bomb, it just saved Goldman Sachs (and it's creditors AIG) and let Lehman Brothers die. Smart choice by Henry Paulson, I'd expect no less by a former senior GS manager.
It used tax-payer money and I'd be angry if I were an American. I'm angry at the Greek government who did the same thing (among many other things), but then again. I live in Greece, I get a choice (More than 30 parties run in the elections last time I checked...). In the US I get the feeling that you can vote Democrats or Republicans. Largely disputable policies like this, are never going to change.
I'm not saying I agree with that line, I'm saying that this is what the (Bush II) government was signaling at the time. (Which for them was likely true -- losing Lehman, Goldman and AIG in a month would have destroyed a world of wealthy executives.)
Greece is another matter; the problem there was not with the bailout, but with stupid terms imposed by the troika to cover debts. In fact, if the troika had behaved with Greece in the same way the US government did with US banks (putting up cash right away, no questions asked), Greece would not have suffered what it did.
The losses would have to be written off somehow, maybe it could have been done more slowly, but I wouldn't think too much about the trigger for the crisis.
For the government's balance sheet, getting paid back 8.6% is a lot more reliable than your gut instinct of infrastructure or education or (especially!) health care.