Crisis Programs May Earn Long-Term Profit, U.S. Treasury Says

The U.S. Treasury Department, defending the Obama administration’s efforts to fight the financial crisis, said programs intended to right the economy and bail out companies such as General Motors Co. (GM) may earn a profit for taxpayers in the long term.

That assessment includes bailouts of banks and automakers under the Troubled Asset Relief Program as well as Federal Reserve crisis measures, such as large-scale asset purchases, according to Treasury officials who briefed reporters in Washington yesterday on condition of anonymity. It excludes the $825 billion stimulus package passed in 2009.

The officials said they wanted to combat public perceptions that the programs were too expensive or had failed, and they cited estimates published in news media in 2008 and 2009 that the bailouts would cost into the trillions of dollars. The programs ended up working better and losing less money than anyone could have projected, one of the officials said.

“They have a good story to tell, but it’s a strange mix of things they’re counting,” said Phillip Swagel, former assistant Treasury secretary for economic policy in the George W. Bush administration and now a professor at the University of Maryland in College Park. He said he questioned whether profits from the Fed programs should be taken into account alongside funds to bail out car companies.

Congress Republicans

Republicans in Congress have criticized the bailouts, which began under Bush in 2008 and continued under President Barack Obama starting in 2009. Republican presidential candidate Mitt Romney supported aid for banks while opposing help for automakers.

The Treasury presentation came the same day Fed Chairman Ben S. Bernanke gave a speech in New York defending the central bank’s response to the crisis. The Fed’s actions as financial firms were failing “reflected the best of bad options,” Bernanke said yesterday.

The chairman of American International Group Inc. (AIG), the insurer rescued by a 2008 U.S. bailout, said yesterday that the government may exit its stake in the company by next year.

“It will be Treasury’s choice as to when they want to liquidate” their shares, AIG Chairman Steve Miller said in a Bloomberg Television interview. “But it is certainly within the realm of possibility that it could happen within the next 12 months.”

AIG Chief Executive Officer Robert Benmosche, 67, has repurchased shares from the government to help the company regain independence from its rescue and improve return on equity. New York-based AIG bought back $3 billion of stock from the Treasury last month at $29 a share as the department sold the same amount at that price in an offering to investors, cutting the U.S. stake to about 70 percent.

Subject to Change

The Treasury’s projections on the costs of the financial rescue are subject to changes in the economy and financial markets, and extend as much as a decade into the future. Investments in mortgage-finance companies Fannie Mae (FNMA) and Freddie Mac have a current net cost of $151 billion that the Office of Management and Budget projects will fall to $28 billion by fiscal year 2022.

The TARP, used to bail out financial firms, including Citigroup Inc. and Bank of America Corp., as well as automakers, is projected to lose about $60 billion, the officials said.

The auto industry has added more than 230,000 jobs since the bailouts, according to the Treasury. The potential cost to families and businesses that rely on the sector would have been far greater than the $22 billion that the Treasury estimates it will lose on that auto portion of the crisis-rescue plan.

Making up for some of the losses are gains from the Fed programs, including emergency liquidity plans and asset purchases. Earnings from those efforts are projected to reach $179 billion through fiscal 2015.

The Fed bought $2.3 trillion of bonds from December 2008 to last June in an effort to reduce long-term borrowing costs and spur the economy. The Fed returns interest income from those holdings to the Treasury after covering its expenses.

The officials also showed statistics illustrating financial difficulties for families, including a decline in real median household income to $49,445 in 2010 from $53,252 in 1999.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net;

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Fannie Mae headquarters stands in Washington, D.C.

Fannie Mae headquarters stands in Washington, D.C. Photographer: Andrew Harrer/Bloomberg