TARP bill likely to be fraction of initial forecast

Bailed-out banks, insurers and automakers are a sore spot for millions hurt 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, the Treasury Department’s investments in banks through the Troubled Asset Relief Program have done surprisingly well, Bloomberg Businessweek reported last week.

Lower-than-expected losses on auto and insurance companies, as well as the financial markets’ return to strength, mean that 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,” said Douglas J. Elliott, a fellow at the Brookings Institution.

After shutting down the spending phase of the TARP program last week, the government 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.

“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, said Herbert M. Allison Jr., the former Merrill Lynch & Co. Inc. executive and Fannie Mae official who shepherded the rescue effort for Treasury Secretary Timothy Geithner and left the job last month.

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

Sen. Bob Bennett, R-Utah, lost his bid for a fourth term in May when Republican delegates voted him off the primary ballot in favor of Tea Party-backed lawyer Mike Lee at a state convention where attendees jeered Mr. Bennett as “Bailout Bob.”

“Unfortunately, the public hates the banks so much that they cannot accept that a program that did the banks so much good could also have been a real boon to the public,” Mr. Elliott said.

Many candidates who survived 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 had pretty much run its course by the time Congress passed the financial-regulation overhaul in July. That law barred new spending with TARP money and cut the program to $475 billion, most of which has been committed.

Of the rescue’s many programs, there are three main sources of red ink: giant insurer American International Group Inc., 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, the Treasury Department will convert a preferred stake in AIG to common stock and sell that off over time. The insurer also plans to divest two non-U.S. divisions.

Previous projections have forecast 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 said. Taxpayers conceivably could turn a profit, depending on the market’s view of AIG’s value, the official said.

The Treasury Department also expects to lose $27 billion on its aid to General Motors Co. and Chrysler Group LLC, 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. The Treasury Department 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 Investment Program. The Treasury Department committed $22 billion to help investors buy securities at non-fire-sale prices.

A conservative estimate of the cost of the program is $500 million or less if the funds keep up their strong returns.

Meanwhile, the Treasury Department is raking in money as it reclaims its capital injections into U.S. banks. The biggest names have mostly repaid, each providing the government with a tidy profit.

After collecting repayments, dividends and proceeds from warrant sales, the department earned a 14% return on the $10 billion it gave to The Goldman Sachs Group Inc. and a 13% return on its $10 billion loan to Morgan Stanley.

Citigroup Inc. is the lone question mark. The Treasury Department poured $45 billion into the banking giant.

So far, $30.5 billion has come back to the government, which still owns 17.5% of Citigroup and is selling that common stock into the market.

Related Topics: Banking