Is TARP Profitable?The huge government bailout could have cost taxpayers $700 billion. Now it looks like it might break even.
By Daniel GrossPosted Friday, Aug. 28, 2009, at 1:26 PM ET
Former U.S. Treasury Secretary Henry Paulson. Click image to expand.Former Treasury Secretary Henry Paulson The Troubled Asset Repurchase Program, the controversial $700 billion package passed in the heat of last fall's presidential election campaign, wasn't presented as a bailout of a failed system. Rather, then-Treasury Secretary Henry Paulson and his allies touted it as an opportunity for the taxpayer to profit by making investments in name-brand companies. Indeed, during the Great Panic of 2008, American taxpayers reluctantly made a series of very expensive investments in blue-chip companies—Fannie Mae and Freddie Mac, the insurer AIG, General Motors. Since these bailouts were designed to halt failure rather than stimulate growth, the return on most of these efforts has been largely intangible.
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And yet. As we approach the one-year anniversary of the Panic of 2008, it's clear that the actual cost of the TARP will be a fraction of the original $700 billion estimate and that taxpayers are even turning a profit from the central component of the package. The initial effort that Paulson began, and that his successors in the Obama administration continued, had the characteristics of an investment fund. Under the Capital Purchase Program, the government would borrow from the public at low rates—1 percent or so per year—and lend the money to banks at 5 percent, through the purchase of preferred shares. As investors in troubled companies do, the government demanded something extra: warrants, which are the right to buy a stock at a set price. It's kind of like lending money to someone to buy a house but getting ownership of the basement as part of the deal.
The exhaustive spreadsheets at financialstability.gov document the status of the 667 investments made under CPP since last fall. To date, 21 institutions have repaid the principal amount and repurchased the warrants, and 15 more have repaid the principal. Morgan Stanley, which borrowed $10 billion in October 2008, redeemed the preferred shares in June and purchased the warrants for $950 million on Aug. 12, giving taxpayers a return of 12.7 percent, according to SNL Financial. For the 21 companies that bought back the shares and the warrants, the taxpayer received an annualized return of 17.5 percent—which is better than most hedge funds have done in the past year. Since many of the largest financial institutions raised private capital to substitute for government capital, the 36 "exits"—a tiny fraction of the transactions—represent 34 percent of the total. The bottom line: Taxpayers put $204.4 billion into the banks through CPP and have received $70.2 billion in principal, plus about $10 billion in dividends and warrant payments. The repaid money goes back into Treasury's general fund, while a small amount has been put back to work. On Aug. 21, AmFirst Financial Services in McCook, Neb., received $5 million from the CPP. Today, 633 banks still owe the Treasury $134.2 billion.
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