Treasury Earns 4% a Year on TARP Investments: I'm Not Impressed

Includes: CIT, GS, SPY, XLF
by: Geoffrey Rocca

I read in the news today that on the second anniversary of TARP, the government has earned 8.2% on its investments in banks and insurance companies, which comes to about 4% a year. The article claims that many investors expected the deal to have losses running into the billions, which I suppose is true, but I'm definitely not convinced that these results vindicate the program. After all, in order to know how well it went we have to compare it to private bailouts.

Consider the CIT Group (NYSE:CIT) bailout; in July of 2009, after the government announced that it would not receive a second round of TARP financing, it was forced to look for salvation elsewhere. It found it in a group of bondholders that included Seth Klarman, noted value investor, and the terms were much better for the lenders than 4%. They required an interest rate of LIBOR + 10%, or 13%, whichever is greater, plus a security interest amounting to 5 times the amount of any borrowing, plus a dizzying array of fees: 5% for any amounts lent, 1% per year for any amounts not lent, and a 2% exit fee. Although CIT Group was unsuccessful in avoiding bankruptcy, the loan company made out all right; because of their security interest they would receive every penny of principal owing to them including interest after the bankruptcy filing.

For another example, in September 2008, Warren Buffett purchased from Goldman Sachs (NYSE:GS) $5 billion in preferred stock that yields 10% per year, plus warrants--stock options, basically--to purchase $5 billion in Goldman Sachs common stock at a price of $115 a share. Goldman Sachs currently trades at $157 per share. Of course, that deal was put into place before anyone knew that TARP would pass, but in those two years Warren Buffett has made $1 billion in dividends plus about $1.8 billion in intrinsic value of the warrants. That's a return of 24.9% per annum over roughly the same period that TARP has produced 4%.

Of course, these deals are the cream of the crop when it comes to bailouts, but when I look at them I still can't help feeling a little shortchanged when it comes to TARP.

Disclosure: No positions in any stocks mentioned