Treasury Has Profited from Big Bank Bailouts

Tuesday, 27 Apr 2010 08:28 AM

By Patrice Hill

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At a time when both parties are competing to crack down the hardest on Wall Street banks, it might come as a surprise to know that the Treasury has been making a tidy profit on most of the government's Wall Street rescue operations.

What few in Congress are disclosing is that the government's non-bank rescues have become the biggest drain on taxpayers, including the burgeoning bailouts of mortgage giants Fannie Mae and Freddie Mac, insurance giant American International Group, and Detroit's General Motors and Chrysler.

All but one of the megabanks that have raised populist ire — including Goldman Sachs, JP Morgan Chase and Bank of America — repaid the government bailout funds long ago, along with interest and dividends that made the deals profitable for the Treasury. Citigroup is the only major bank that has not repaid in full, though it has announced plans to do so.

While many smaller banks still have not repaid their government assistance, industry lobbyists say the much-maligned Troubled Asset Relief Program has proved to be mostly a big win for taxpayers and the economy.

"Two-thirds of the TARP investment from banks has already been repaid with a large profit to the taxpayer," said Steve Bartlett, president of the Financial Services Roundtable. "TARP was a positive boost to the economy and the government, and taxpayers are seeing a positive return on their investment."

The Federal Reserve reported last week that it had transferred a record $47.4 billion in profits to the Treasury in 2009 from its Wall Street rescue operations — up 50 percent from 2008.

About half of that came from interest that the central bank earned on Fannie Mae and Freddie Mac mortgage bonds it purchased in the past year to support the housing market and keep 30-year mortgage rates near record lows.

The Fed's profits were used to help reduce the government's sky-high budget deficit, but were not enough to offset the huge cost of Fannie and Freddie's taxpayer bailout — which stands at $127 billion and is expected to grow to as much as $400 billion by some estimates.

In an unexpected development, the Fed said it was also on course to earn money on the notorious portfolio of supposedly toxic bonds it acquired from Bear Stearns two years ago to sweeten a merger deal it arranged with JP Morgan Chase.

That deal marked the start of the government's massive Wall Street bailout operations, which burgeoned throughout 2008 as the threat of massive failure in the banking system forced Congress to enact the $700 billion bank bailout fund.

But the mostly untold story is that most of the money was never used, in large part because the program was so unpopular that Wall Street banks — worried about the congressional backlash and pay restrictions attached to the funds — returned their bailout cash and then declined to take part in several programs that the Treasury set up to help unfreeze credit markets.

As a result, a $1 trillion program the Treasury set up to help banks unload their toxic mortgage assets spent only $30 billion, though that was the "troubled asset relief" part of the bank bailout fund for which TARP got its name.

Another $1 trillion program that the Treasury and Fed set up jointly to help unfreeze securitized loan markets spent only $48 billion. Similarly, thanks to dramatic improvement in the credit markets in the past year, a $333 billion asset guarantee program set up by Treasury, the Fed and Federal Deposit Insurance Corp. was never tapped.

Since the credit programs were barely used and loan securities markets have been rebounding on their own, the Treasury and Fed have been quietly shutting down the programs in recent months.

Meanwhile, the Treasury is expanding other uses for the cash aimed at helping Main Street rather than Wall Street.

Those programs to help small businesses get loans and help defaulting homeowners renegotiate their mortgages have cost about $60 billion. But spending could go much higher under the Treasury's plans, which also would greatly increase the losses incurred by Fannie and Freddie, which guarantee the defaulted mortgages.

The result is that the "bank bailout" fund today is primarily benefiting small banks, AIG, which has received more than $100 billion in assistance and has failed to make its dividend payments to the Treasury, as well as GM, Chrysler, GMAC and various automotive suppliers, which are on track to receive a total of $90 billion in funding from the Treasury.

GM last week made an early repayment of $6.7 billion in loans it got from the Treasury, but it is not clear whether or when the Treasury will recoup the rest of its $50 billion investment in GM, which is held in the form of common and preferred stock. The nearly $20 billion invested in Chrysler, which has seen its sales plummet in the past year despite the bailout, may never be recouped.

About $67 billion in TARP funds have gone to 640 smaller banks, a couple of which have shut down, resulting in a $2.3 billion loss to the Treasury. About 80 of the small banks have failed to make scheduled dividend payments.

Despite the apparent success of the bailout program, the political myth that the funds were wasted on bailouts of greedy Wall Street firms refuses to die, and in fact has taken on new life this month as Congress takes up legislation to reform the financial sector.

President Obama traveled to Wall Street last week to reprimand investment houses for resisting the legislation and to whip up public sentiment once again in an effort to drive a Democratic reform bill through the Senate.

Nearly every time the Senate's 41 Republicans seek changes in the heavily regulatory bill, Democrats accuse them of siding with Wall Street. Republicans respond by insisting that the bill as written would perpetuate "Wall Street bailouts" that the public never again wants to finance.

Treasury Secretary Timothy F. Geithner has played both sides of the political fence, on the one hand calling for a massive crackdown on Wall Street while on the other hand touting the profits the Treasury is making from the bank bailouts and trumpeting the resulting dramatic reduction in deficit spending.

Thanks to the bank repayments, as well as profits from the sale of bank stock acquired through the bailouts, the program turned from a money loser into a profit center for the Treasury early this year.

Moreover, the dramatic drop in projected TARP spending is largely responsible for a nearly $200 billion drop in the government's projected budget deficit that the administration has been touting as proof of fiscal discipline.

Despite that, the president this year took bank bashing to new heights and proposed a tax on the largest financial firms to recoup the continuing cost of the programs for small banks, the auto industry and insurance companies.

Detroit rarely is the target of such punishment or invective from the White House and congressional leaders, though the Treasury could lose much of the money it invested there.

"We are confident that [GM] is on a strong path to viability," Mr. Geithner said last week.

He suggested that the Detroit bailout was worth the cost in any case because of the "countless jobs saved," though thousands of layoffs in the auto sector were a major contributor to the unemployment crisis last year.

© Copyright 2014 The Washington Times, LLC

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