Earning profits on bailout money
Posted: Wednesday, September 2, 2009 8:01 pm
By MARCY GORDON
AP Business Writer
WASHINGTON (AP) — A gaggle of big banks have repaid their loans to the government under the $700 billion financial rescue. Is there a chance taxpayers will eventually recoup the rest of the money spent on this and other bailouts — and maybe even take in a little profit?
Here are some questions and answers about recovering bailout money.
Q: Which banks have repaid their government loans?
A: The government injected capital into hundreds of banks under the Treasury Department program set up in October after the financial system — and U.S. officials — peered into the abyss of collapse. A towering scaffold of other government programs, including tens of billions in Federal Reserve emergency loans and FDIC guarantees for debt issued by banks, sprang up to ward off financial catastrophe.
The bank bailout program and the economic stimulus package that came in February together topped $1 trillion, pumping up the federal deficit.
In June, banks began repaying the money they received under the Troubled Asset Relief Program, or TARP. The “repayers” so far include some of the nation’s biggest and best-known banks. Among them: JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc., U.S. Bancorp, American Express Co., BB&T Corp., Bank of New York Mellon Corp. and Northern Trust Corp.
Q: Did the government earn any profits when the money was paid back?
A: The government has made around $4 billion in profits from the eight above institutions and another $35 million from 14 smaller banks, according to calculations by The New York Times in a report published Sunday.
In return for the government aid, the banks issued the Treasury warrants to buy their common stock at a set price over the next 10 years, and preferred shares carrying a 5 percent annual dividend rate. The government’s profits come from those dividends and increases in stock prices.
Q: So it’s all good, right? The government is getting a healthy return on its emergency investment in the banks?
A: Not exactly. While some banks that received TARP money have paid it back, many haven’t — including banking giants Citigroup Inc. and Bank of America Corp., which each received $45 billion. Some of the banks many never repay the money.
And there is the possibility of big losses for the government on its rescues of mortgage finance companies Fannie Mae and Freddie Mac (combined $96.3 billion so far), insurance conglomerate American International Group Inc. ($182 billion), and carmakers General Motors Co. and Chrysler Group LLC (combined $65 billion).
For the bank bailout, “It’s probably a break-even for the government,” says Mark Zandi, chief economist at Moody’s Economy.com. While some big banks quickly repaid, some of the small and midsize institutions that received aid are likely to fail and the government won’t recoup all its investment there, he said.
Overall, “This crisis is going to cost taxpayers money,” said Zandi — but still less than a complete financial collapse and cratering of the economy would cost.
Q: Right. But didn’t government leaders say there wouldn’t be a loss on the investment when they asked Congress for the bailout money last fall?
A: They did, though profit was the least concern at a time when financial disaster was at hand and the economic ship needed to be righted.
Now the government faces a bit of a dilemma. Officials and policymakers want the government to get out of the business of owning companies or shares in them soon, but it could lose out on potentially bigger returns if it sells them quickly rather than waiting for values to rise.
“The best solution is for the government to get out as soon as possible,” says Martin Zimmerman, a former chief economist at Ford Motor Co. who teaches at the University of Michigan. “That means sacrificing perhaps some return down the road.”
Q: What about the auto bailout in particular? What are the chances the government will recover its investment there?
A: The Congressional Budget Office has given a pessimistic outlook for a full refund, estimating recently that only about $15 billion of the initial $55 billion to GM, Chrysler, its financing arms and suppliers would be repaid. The analysis didn’t include the $30 billion GM received to help it navigate bankruptcy.
Administration officials say they want to dispose of the government’s ownership interests as soon as practicable.
While the U.S. stake is much smaller in Chrysler — the company is now aligned with Italian automaker Fiat — there will be intense scrutiny on the government’s share of GM. GM is expected to conduct an initial public offering of its stock next year and its shares would need to grow in value for the government to break even or make money.
Q: And Fannie and Freddie?
A: The government owns 80 percent of each company. Analysts say it could be years before there is a return, if it ever happens.
“There is no fundamental value remaining” in the companies’ shares and “we expect more government capital injections in the coming quarters,” Paul Miller, an analyst at FBR Capital Markets, wrote in a research note published Monday.
AP Business Writers Stephen Manning, Jeannine Aversa and Alan Zibel contributed to this report.
Published in The Messenger 9.2.09