Payback for TARP bailout

Payback for TARP bailout

September 1st, 2009 in Opinion Times

Skepticism abounded last fall about the federal government's $700 billion bailout of troubled investment and commercial banks and other financial institutions under the Troubled Relief Asset Program, or TARP, as it became known. Critics doubted taxpayers would ever get their money back, and many skeptics said the banks should have been allowed to fail, never mind that such an irresponsible response surely would have triggered a global financial meltdown and Great Depression II.

Fortunately, saner heads prevailed. And now, some of the largest bailout recipients have already repaid their TARP loans, plus interest. The upshot: taxpayers already have made more than $4 billion in profit on the reimbursements of just the eight largest banks which have repaid all their TARP and related loans entirely. It's earned another $2.2 billion from two institutions that have paid off their TARP funds, but still must repurchase warrants for stocks.

Goldman Sachs, for example, repaid a $10 billion TARP loan at a rate which earned the government $1.418 billion. The government earned $1.268 billion on Morgan Stanley's repayment of a $10 billion TARP loan. American Express' payoff of a $3.389 billion loan generated $414 million in U.S. profit. US Bancorp paid off a $6.6 billion loan, plus $334 million in interest. Repayments of TARP loans totaling $9.1 billion to four other large banks generated $651 million in government profits.

JPMorgan Chase paid off $25 billion in TARP money, generating a government profit of $1.932 billion. Capital One Financial repaid $3.550 billion, plus interest of $321 million. These two institutions are expected to generate additional government profits upwards of $3.1 billion when they buy back the warrants they issued to the government for stock purchases. The government purchased those warrants on low fixed prices for stocks which have soared in value as the banks' stock values have recovered.

In addition , the government has earned another $35 million from 14 smaller banks that also have repaid their TARP loans. The government is also due about $6.2 billion in interest from banks that have not yet paid off their TARP loans, but are expected to do so.

This good news on the profits the government has captured on the $240 billion expended on the bailout of financial institutions does come with caveats. The government could still lose substantial sums on two of the largest banks, Citigroup and Bank of America, which took $45 billion apiece in TARP money, and Wells Fargo, which took $25 billion in TARP funds. If these banks can manage to deal with their toxic mortgages and repay their TARP loans, however, they could generate another $18 billion in profits to the government.

The government also faces the risks of huge long-term losses for the costly bailouts of the federal mortgage giants Fannie Mae and Freddie Mac, as well as big loans to General Motors and Chrysler. The Treasury Department also took on a potentially costly guarantee program for the toxic mortgages that still haunt the commercial and investment banking systems. And it's struggling to recover $85 billion in TARP loans to the giant American Insurance Group, which it now owns and is trying to sell off in pieces.

The irony of AIG's bailout costs is that it largely enabled the recovery cited above of big investment banks. The banks relied on insurance they purchased from AIG, in the form of credit default swaps, for their risky investments in derivatives based on toxic mortgage securities they purchased in the real estate bubble. AIG wasn't required to have reserves for its purchases and, as it turned out, it was simply kiting unsecured insurance.

The banks as well as AIG should have known how risky and flawed those securitized mortgage investments were. But they weren't looking for quality securities as long as AIG would write them default swaps. When the bubble burst, the government bailout of AIG made it possible for giant insurer to pay off its credit default swaps to Goldman Sachs ($12.9 billion), Deutsche Bank ($11.8 billion), Bank of America ($5.2 billion), Morgan Stanley ($1.2 billion), and JPMorgan Chase ($400 million), among others.

In short, these big banks survived by double bailouts from the taxpayers. Now that they have collected AIG's taxpayer-financed reimbursements, they have paid off their official government loans, and are ready to begin paying big bonus packages again to their representatives. What's more, they're set to earn about $1 billion collectively for managing the breakup and sell-off of AIG.

This entangled mess of bonus- and profit-taking on AIG's bailout and breakup simply stinks. The banks were just as culpable in passing on the burden of their flawed investments to the taxpayers, through AIG, as AIG was in insuring them. The banks should be made to pay back more to account for AIG's losses on their investments. Otherwise, taxpayers are still getting socked for their costly and reprehensible lack of due diligence in the flawed investments that nearly precipitated another Great Depression.