Profit on TARP Repayments Will Only Cancel Out Other Losses

Before we start jumping for joy that the government stands to make a nice profit on the $68 billion of TARP money that is now eligible to be repaid, let’s consider that the gains are only from relatively healthy institutions. By forcing each of the nation’s biggest banks to accept TARP funds, former Treasury Secretary Paulson essentially assured profits would be generated on some of the loans, but we really need to look at the big picture. In order for the taxpayer to come out ahead, the gains on the good investments need to cancel out the losses on the bad ones.

Do the profits on $68 billion of TARP capital do the trick? Hardly. AIG received $70 billion from TARP, GM and Chrysler got $17.4 billion, and another $30 billion in slated to fund bankruptcy proceedings for the auto makers. That’s more than $117 billion that the government has tied up in 3 firms. It will take years to get that money back, and in the case of AIG, it appears unlikely a full recovery is a reasonable expectation. So, while $68 billion coming back to us is a good thing, let’s not get carried away and start calling TARP a solid “investment” just yet.

Full Disclosure: No position in AIG or GM at the time of writing, but positions may change at any time (unlikely in this case, however)

Comments

[Mr. Ed, Jr.:]

The author is correct regarding this scam that is now being reported by MSM idiots as earning a profit for taxpayers.

There are no TARP "profits", and there never will be.

When we have ALL of the TARP money back (That means from all of the corrupt "money-funnelling" scams that bailed out Goldman and other favored cronies) , then and only then should "profits" be claimed.

And no politician will deserve any thanks for it, either. In fact, it is way past the time for any remaining honest men and women who allegedly represent us to stand up and put a stop to these ongoing thefts. Do your duty.

Jun 12 02:53 AM

[Moon Kil Woong:]

The best outcome will be to hope they don't return back for more funding if the going gets tougher. Also, since they have all seen fit to dump their debt instruments onto the Fed and Treasury, aren't they in a way repaying us with our own money? And aren't they really still dependent on the government. Likewise, if what they sold to the government or Fed eventually turn into losses aren't the taxpayers eating it still. With $8 trillion in backstops and the Federal Reserve looking like the biggest too big to fail bank itself, I agree that it's hard to believe that taxpayers will come out smelling anything better than a mob of people who just trudged through a giant sewer.

Jun 12 06:22 AM

[Stephen Yu:]

It is also nearly certain that the loan to GM will creates a loss for taxpayers. The following is what Barron's wrote on June 8:

"The federal government may be lucky to get back half of the $50 billion owed by GM (ticker: GMGMQ), consisting of nearly $20 billion of existing loans and about $30 billion that Uncle Sam plans to extend through so-called debtor-in-possession financing in bankruptcy. ("Uncle Sam's GM Follies")"

"The government effectively is making a gift to the UAW, because it is converting about $40 billion of its GM loans that are senior to the UAW claims into a 61% equity stake in the new company, making its recovery highly dependent on the new GM's equity value."

"With Wall Street anticipating a $24 billion market value for the retooled GM, the government loans would be valued at about 50 cents on the dollar, after factoring in the $8.8 billion of new GM debt and preferred that Uncle Sam will get. For the government to come out whole, GM's equity value would have to approach $70 billion -- a very unlikely outcome. Ford (F) and BMW (BMW.Germany), arguably stronger companies, each have market values of $20 billion."

Jun 12 02:56 PM