TARP Didn't Bust the Bank

Bailed-out banks, insurers, and automakers are a sore spot for millions of Americans hit hard by the financial crisis. Candidates running in November, especially those waving the Tea Party banner, are using "no more bailouts" as their mantra to attract voters. Yet there's a disconnect between the political rhetoric and the facts on the ground.

The Treasury Dept.'s investments in banks through the Troubled Asset Relief Program have done surprisingly well. Lower-than-expected losses on auto and insurance company rescues, as well as the financial markets' return to strength, mean the $700 billion rescue plan launched in October 2008 will cost less than one-tenth its initial price tag. "The TARP may well be the best and most useful federal program that has ever been despised by the public," says Douglas J. Elliott, a fellow at the Brookings Institution and a former JPMorgan Chase (JPM) managing director.

As Treasury gets ready to shut down the spending phase of the TARP program on Oct. 3, it now expects to turn a $16 billion profit on the $250 billion it plowed into banks in 2008 and 2009. And TARP's final price tag is expected to be about $50 billion, according to an Obama Administration official. The Congressional Budget Office in August had estimated a $66 billion loss. Treasury Secretary Timothy Geithner is expected to brief President Barack Obama on Sept. 30 on the brighter outlook.

"When all is said and done, this program will be viewed as one of the most effective and least costly forms of assistance" in the financial crisis, says Herbert M. Allison Jr., the former Merrill Lynch (MER) executive and Fannie Mae (FNM) official who has shepherded the rescue effort for Geithner and leaves the job on Sept. 30.

Despite the turnaround, TARP remains a political career-killer. Numerous candidates have lost their primaries this year in part because they voted for the bill under President George W. Bush, who urged lawmakers to approve it or risk a global financial calamity.

The victims include Senator Bob Bennett (R-Utah), who lost a May primary to Tea Party-backed lawyer Mike Lee at a state convention where attendees jeered Bennett as "Bailout Bob." More recently, Missouri Secretary of State Robin Carnahan, a Democrat running for the Senate, has taken to calling her opponent, Representative Roy Blunt, "Mr. Bailout" for helping round up Republican votes when the TARP bill was on the House floor. Even Carna-han's brother, Russ Carnahan, voted for the measure as a Democratic member of the House. "Unfortunately, the public hates the banks so much that it cannot accept that a program that did the banks so much good could also have been a real boon to the public," says Elliott.

Now many candidates who won tough primaries are calling for TARP's dissolution. House Republicans vow to cancel the program. Ending it now, however, would have little effect other than to deprive homeowners of getting help, now that TARP's focus is shifting to managing the government's investments, collecting repayments, and preventing home foreclosures. In reality, the program was pretty much shut down in July when Congress passed the financial regulation overhaul. That law bars new spending with TARP money and cuts the program to $475 billion, most of which has been committed.

Out of the rescue's many programs, there are three main sources of red ink: giant insurer American International Group (AIG), the auto industry, and assistance to homeowners. The Obama Administration for months has been negotiating an AIG exit strategy in hopes of recouping its $182 billion government lifeline and restoring the company to independence. Under the plan, which could be announced as early as Sept. 30, Treasury would convert a preferred stake in AIG to common stock and sell that off next year. The insurer would divest two non-U.S. divisions. The CBO last month projected that $45 billion from AIG's $70 billion in TARP money would be lost. The AIG deal, however, might result in losses of $10 billion or less, the Administration official says. Taxpayers could conceivably turn a profit depending on the market's view of AIG's value, the official says.

Treasury also expects to lose $27 billion on its aid to General Motors and Chrysler, their financing arms, and their suppliers, out of $82 billion committed to the industry. Some $30 billion dedicated to homeowner assistance was never expected to come back to the government. Geithner's Treasury allocated the funds to banks and loan servicers that modify mortgages and avert foreclosures.

The one program aimed at the distressed securities that originally froze bank balance sheets is likely to be a wash: the Public-Private Partnership Investment Program. Treasury committed $22 billion to help investors buy securities at non-fire-sale prices. The effort is conservatively estimated to cost about $500 million, or less if the funds keep up their strong returns.

Meanwhile, Treasury is raking in money as it reclaims its capital injections into U.S. banks. The biggest names have mostly repaid, each providing Treasury with a tidy profit. After collecting repayments, dividends, and proceeds from warrant sales, the department earned a 14 percent return on the $10 billion it gave to Goldman Sachs (GS), and a 13 percent return on its $10 billion to Morgan Stanley (MS). Citigroup (C) is the lone question mark. Treasury poured $45 billion into the banking giant. So far, $30.5 billion has come back to the government, which still owns 17.5 percent of Citi and is slowly selling that common stock into the market.

The bottom line: TARP's bank bailouts are turning a profit, and TARP overall may cost about $50 billion, hardly the boondoggle many pols charge.

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