Aug 31, 2009
With a number of banks set to repay TARP money back to the government, one question in many people’s mind is, “Did the taxpayer make money from the government’s initiative?” Well, the New York Times estimates that the government earned around $4 billion in profits from the repayments made by JPMorgan Chase, Goldman Sachs Group, Bank of New York Mellon Corp, BB&T Corp, US Bancorp, Morgan Stanley, American Express Co, and Northern Trust Corp. In addition, the government gained another $35 million from smaller banks. The banks issued Treasury warrants to purchase common stocks at a fixed price in the next 10 years and preferred shares that carry 5 percent dividend rate. In essence, the government derived its profits from increases in stock prices and the dividends it will receive.
But are the conditions really as good as it sounds? It should be noted that nothing about the deal is fool-proof. Also, a number of large banks have not yet repaid the government. Citigroup and Bank of America, for example, can hardly pay back the government with the state of their finances right now. The two large banks each received around $45 billion from the government. Some smaller banks might not be able to repay the government at all. And aside from banks, the government has infused billions of dollars into mortgage companies Fannie Mae and Freddie Mac as well as insurance company American International Group Inc. Even the auto industry has received more than its fair share with General Motors and Chrysler Group receiving a combined $65 billion. The government carries all these risks and more.
Mark Zandi, an economist from Moody’s Economy.com estimates that the government will break-even from bank bailout. It might incur losses from its capital infusions in other industries. Overall, “the crisis is going to cost taxpayers money – but still less than a complete financial collapse and cratering of the economy would cost”. The US government’s biggest losses might come from the rescue of the auto industry as well as Fannie and Freddie. Right now, the government owns around 80 percent of Fannie Mae and Freddie Mac. Analyst estimates that it will take years before debt relief help for consumers can be seen, if that happens. More capital injections are expected because “there is no fundamental value remaining” in these companies.
There might be a chance for taxpayers to get more returns though. In particular, it can make money from the stocks it owns from the bailed out companies. However, policy makers and even officials want the government out of the companies even if it means losing a potentially big return if it waits for the value to rise. According to Martin Zimmerman, a former chief economist at Ford Motor Co. “the best solution is for the government to get out as soon as possible”.
- Citigroup Inc. Delisted From Dow
- AIG Bailout: Did the Government Overpay?
- America’s Uncounted Debt
- Big Banks Ready to Repay the Bailout Money
- Larger Banks to Pay Bigger Share in FDIC Levy
- Citigroup Loses $7.8 Billion in the Fourth Quarter
- Wells Fargo to Report Profits
- Bankers Reacting Angrily to Pay Cut
- Big Banks Back to their Bad Ways
- Mortgage Rates Increase to 5.2 Percent