The Corner

Did the TARP Money Really Get Paid Back?

I didn’t see the show, but apparently Jackie Calmes of the New York Times was on Candy Crowley’s program on CNN this morning and claimed that the bank and automobile bailouts have been repaid with interest. A friend asks: Is that true?

No, not really. The part of TARP that deals with banks — the big banks, anyway — has largely been repaid: Goldman Sachs, Morgan, Wells Fargo, BONY, and the other bigfoot banks have paid back their loans.

But . . .

Citigroup paid back less than half of its bailout and the government took equity for the rest. We own a fifth of the company (and I wonder if that fact has anything to do with this.)

We still have billions of dollars’ worth of warrants on equity in 280 companies, almost all of them banks and insurance firms. Those warrants represent the option to buy stock at a pre-set price, and Treasury has made a few billion dollars exercising them as bank shares have recovered. It will come as no surprise to you that the American Bankers Association has asked the government to cancel the warrants, representing another multibillion-dollar giveaway to the banks. The administration  is leaning toward accommodating that request by converting the taxpayers’ interest into a special small-business lending scheme, which we can safely assume will be handled with all the transparency and deftness that we have come to expect from similar programs run by the Small Business Administration.

The warrants business doesn’t represent all that much money in the grand scheme of TARP, but it is kind of interesting. Here’s a bit from finance professor Linus Wilson’s testimony before the House:

We meet today on almost the one year anniversary of the first warrant transaction, with Old National Bancorp. That transaction demonstrated that the U.S. Treasury without oversight will squander the taxpayers’ profits from their very risky investments in the banking sector. The auctions of several banks’ warrants make me hopeful that the taxpayers will get close to fair market value for their warrants in over 280 publically traded banks. Yet, by my estimates, the U.S. Treasury and the administration today plan to squander a fair market value of warrants and preferred stock of approximately $3.0 billion by allowing existing Capital Purchase Program recipients to cancel their warrants and convert their preferred stock into the proposed Small Business Lending Fund. Thus, vigilance and oversight is essential to ensure that taxpayers hold onto the returns they have earned from the TARP warrants because the U.S. Treasury left to its own devices has often been a poor steward of the $700 billion of taxpayer funds.

. . . The proposed $30 billion Small Business Lending Fund would allow over 580 of the smaller Capital Purchase Program recipient banks to wipe out the warrants worth $457 million, according to my estimates.

As Professor Wilson notes elsewhere, the big banks have been better about paying off their TARP obligations, mostly because the stigma of the program hurts their bottom lines. But the smaller banks are another story: In March, Professor Wilson identified 82 banks that had missed interest payments or dividends owed to the government: “Even as more firms try to feed at the trough of subsidized government capital, it seems clear that a lot of the banks that have received government capital were not worth the risk,” he writes, noting that “one-eighth of the banks remaining in the ‘healthy bank’ program are behind in their payments.”

Back to the major institutions: AIG and GMAC are the stuff of nightmares. In the case of AIG, we put up $40 billion for a company whose entire market capitalization, if I’m reading Yahoo right, is $5 billion. And the automakers have not paid back the capital we put into them, because the government took equity instead, which is why we own a tenth of Chrysler and three-fifths of GM. GM proudly advertised that it has repaid its government loan, which it did — out of a taxpayer-funded escrow account, i.e., it “repaid” its government money with government money. Senator Grassley blew a righteous head gasket over that shenanigan, the Competitive Enterprise Institute filed a false-advertising complaint in response to GM’s dishonest PR campaign, and the stink rose so high that even the New York Times caught a whiff.

So there’s that.

Oh, yeah: Fannie Mae and Freddie Mac have an infinite line of credit at Treasury and portfolios bursting with the worst kind of junk. Plus, we’re going to lose a bundle on the mortgage-assistance programs tacked on to TARP.

Short version: If TARP had only done what TARP was supposed to do — prop up the banking system — it still would have been a mess, but a mess for which the banks, not the taxpayers, ultimately would have picked up the tab. With everything that’s rolled  up into TARP, we’re going to take a bath. And it could get really bad if we don’t do something about Fannie and Freddie – and by doing something I don’t mean getting behind a whole new passel of weak mortgages made to people who cannot even raise the money for a down payment.

I hope that answers the question.

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