TARP to break even!?

[jimmy olsen]

If true, excellent news.

http://www.slate.com/id/2226517/

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

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.

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.

Investors have seen other returns from the CPP. Treasury in July converted the initial $25 billion CPP loan to Citi into common stock, at a price of $3.25 a share. The U.S. taxpayer now holds 7.69 billion shares. Given its close Thursday at $5.05, taxpayers have reaped a $13.8 billion paper gain from this investment—a 55 percent return in about a month.

Officials warn that we can't extrapolate the early returns to the broader pool, because of what economists call adverse selection. In English, it means the healthiest banks paid back as soon as they could raise private capital, leaving behind the weaker institutions that may be less likely to pay back in full. We'll get a better sense in November, when Treasury places a formal value on the remaining investments.

Of course, there's more to the TARP than the CPP. (Scroll down through this spreadsheet to see the full details.) Some of that is simply spending, such as $22 billion for home-mortgage modification, never intended to get a return. Others components were designed to produce a return, but are less likely to do so in the near future—loans to automakers ($79.966 billion, of which $2.14 billion has been paid back) and the nearly $70 billion in funding made available to insurer AIG.

Given the returns thus far, Herb Allison, the former CEO of TIAA-CREF who was tapped by Timothy Geithner to run the TARP, notes that "it's quite possible we'll have a positive return on the CPP program as a whole." That's possible.

Even if doesn't, the program—combined with all the other stabilization efforts—has become less of a political and financial liability than it was last fall. In this climate, a 5 percent yield on lending is quite good. The exits—the cash coming back—reduces the amount we have to borrow. In late August, the Office of Management and Budget said the lower expected cost of bailing out the financial system meant the 2009 fiscal deficit would be $1.58 trillion, $262 billion less than the prior estimate of $1.84 trillion. Lee Sachs, counselor to the treasury secretary, invokes a Mastercard ad in weighing the true yield. "Dividends: 5 percent, equity warrants, 2 percent. Financial system not going into total abyss: priceless."

That's one way of looking at it. Plenty of banks are still troubled, with a few failing each week. There were more productive uses for those funds. And regardless of the ultimate performance of the CPP, taxpayers will be out some large chunk of cash because of the incompetence and greed of bankers and the nonfeasance of regulators charged with overseeing them. Still, as they say on Wall Street, the returns are better than a poke in the eye—which is what this sad chapter in the history of American capitalism has been.

A version of this article also appears in this week's issue of Newsweek.

[Jaron]

OBAMA

:worship:

[KRonn]

Lol... not sure if it matters anymore. This little bombshell came out this week, I guess lost in the Kennedy news, and announcements that Bernanke was the pick to continue as Fed chief.


http://www.bostonherald.com/news/us_politics/view/20090825white_house_projects_bigger_deficits_bigger_debt/

Most red ink ever: $9 trillion over next decade

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

But before President Barack Obama can do much about it, he'll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession. Those estimates reflect this year's deeper-than-expected economic plunge.

[Grallon]

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

...

This is getting surreal! 

How long to you think you can keep this up?




G.

[Berkut]

Everyone is banking on the answer being "at least until the end of my term..."

[Savonarola]

Lol... not sure if it matters anymore. This little bombshell came out this week, I guess lost in the Kennedy news, and announcements that Bernanke was the pick to continue as Fed chief.


http://www.bostonherald.com/news/us_politics/view/20090825white_house_projects_bigger_deficits_bigger_debt/

Most red ink ever: $9 trillion over next decade

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

But before President Barack Obama can do much about it, he'll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession. Those estimates reflect this year's deeper-than-expected economic plunge.

NPR had a piece on this; they said don't put too much stock in that number.  The 1989 projection was a large deficit in 1999 and the 1999 projection was a surplus in 2009.

[alfred russel]

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

...

This is getting surreal! 

How long to you think you can keep this up?




G.

Japan's debt is around 170% of GDP, so we should be able to keep it up a while longer.

[KRonn]

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

...

This is getting surreal! 

How long to you think you can keep this up?




G.

I still am having a hard time coming to grips with the numbers. Because if they're actually true, we are screwed so badly that I find it hard to fathom. Such a massively wealthy nation!! It can't be so dire. So I'm sure something will change - a light will shine down from above and Obama will make it all ok, or Cheney will tell all (in his upcoming book) of the  undisclosed location of the hidden treasures of Federal money he and Bush tucked away...... something!! 

[Grallon]

Japan's debt is around 170% of GDP, so we should be able to keep it up a while longer.

You mean the US will keep on borrowing its way into solvency?  And what happens when nobody wants to loan anymore?  I'm no economist but I keep hearing/reading that it becomes dangerous when the value of a country's debt pass a certain % of the GDP (40-50?).



G.

[Hansmeister]

Actually the $9 trillion is still based on unrealistic asumptions.  It assumes that the entire Bush tax cut will be allowed to expire, not just the tax cut on the "rich" as obama had promised.  it assumes that Congress will not adjust the Alternative Minimum Tax for inflation anymore as they have in years past in order to prevent it from hitting the middle class, and the WH assumes that they will get $600 billion in revenue from selling CO2 permits under cap-and-trade, even thought the plan in Congress gives most of them away for free.

Oh, it also assumes Congress will pass a revenue-neutral health care reform bill, which is also a complete fantasy sinch all plans currently under consideration would be massively underfunded.

A more realistic estimate would have the 10-year deficit somewhere north of $14 trillion.

[KRonn]

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

...

This is getting surreal! 

How long to you think you can keep this up?




G.

Japan's debt is around 170% of GDP, so we should be able to keep it up a while longer.

Japan appears to be rapidly plunging to a second rate economy, over the past decade or more. They're falling faster, not slowing or gaining, or so it appears somewhat. I wouldn't think they're a good example for the US to follow.

[DGuller]

By Associated Press
Tuesday, August 25, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

...

This is getting surreal! 

How long to you think you can keep this up?




G.

Without commenting on the actual issue, your surrealness meter suffers from innumeracy.  Both of the statements you bolded are not surreal at all.

There is nothing surreal about debt for the next 10 years being more than all the debt combined in US history.  Without adjusting for the size of the economy, that's just an empty statement meant to impress those without critical thinking skills. 

Speaking of size of economy, having the total debt of 75% of GDP is nothing unusual either.  Obviously you shouldn't add any debt unnecessarily regardless of what percent it is of the economy, but that's not the point here.

[Caliga]

Let's just give all creditors the finger and 'reboot' our debt load to zero.

[Berkut]

Let's just give all creditors the finger and 'reboot' our debt load to zero.

I think you mean 'reset'.

[DGuller]

Because if they're actually true, we are screwed so badly that I find it hard to fathom.

That's not true.