U.S. ends TARP with $15.3B profit

http://money.cnn.com/2014/12/19/news/companies/government-bailouts-end/

by prostoalex • 12 years ago

127 90 12 years ago

money.cnn.com

mikhailt• 12 years ago

Wait, WTF...

At the end:

Overall, the auto bailout was the one big money loser for TARP. Even with the Ally sale, taxpayers lost about $9.2 billion.

Do they mean it could have been 15.3 + 9.2 billion in the end for the total $24.5 billions in profit?

I don't think taxpayers lost anything if the program broke even.

philwelch• 12 years ago

If they bailed out the banks but not the car companies, the treasury would have profited 24.5 billion.

If they bailed out the banks and the car companies and the car companies earned money, the treasury would have profited much more.

But then, the treasury didn't do the bailout to profit. They did it to short-circuit a potential Great Depression. From that standpoint, it was a success at any price.

waps• 12 years ago

I think the misunderstanding is that Ally Financial is "part of the auto industry". Yes, really.

So here's where the numbers come from :

1) +15.3 billion : auto industry + financial industry

which is 0.06% per year, for 3.5% over 6 years

2) -9.2 billion : auto industry

3) +1.3 billion : Ally Financial

Therefore:

4) (inferred) -10.5 billion : auto industry - Ally Financial

5) (inferred) +24.5 billion : financial industry TARP

First caveat. Given the risk on the troubled assets, this is a pathetically bad return over 6 years. These were the worst of the worst, something everybody else would have demanded something like 13-14% interest per year for in 2008.

Second caveat, we all know why the finance industry came out ahead (not necessarily a good publication in this link, just the first reasonable link on Google for this subject) :

http://www.financialsense.com/contributors/greg-weldon/stock...

So really, the full story is, $426 billion TARP + $3 Trillion in loans to banks was sufficient to convince the banks to pay $450 billion to the US government. They have not, of course, paid back the 3 trillion, nor are they capable of doing so.

Third caveat, a lot of that $3 trillion has gone into stock buybacks, effectively giving the money to investors in S&P 500 companies (especially financials). The idea is that the S&P should continue to increase in value, despite the money flow having stopped (mostly). History teaches though, that when this happens, a more common result is a stock market crash. That doesn't happen until loans aren't free anymore though (currently the FED says rate hike will happen around June).

Frankly if you're in a startup, make sure to have a job at Google, Yahoo or Amazon or some large player by the time the rate hikes happen.

pbreit• 12 years ago

0.6% per year. Still pretty bad.

maaku• 12 years ago

If only all bailouts went like this...

_almosnow• 12 years ago

Does that profit takes into account inflation and stuff? Because if not the outcome could be somewhat different. However, even if they broke even, the potential negative effects that the bailout prevented are huge.

crazy1van• 12 years ago

If we're going to think about the bailout like an investment (like the article seems to do), even more important than inflation is comparing this return to other potential returns.

According to the article, the USG put $426B in and made $15.3B. That's a 3.5% return on that money over 5+ years. As an investment, that seems terrible. If the USG had just bought an S&P500 index fund on Oct 3, 2008, they would have made something like +70% (Source: Yahoo Finance). Again, this is just looking at TARP like an investment by the government.

intopieces• 12 years ago

But the S&P500 includes companies that were, in some way or another, affected by the bailout. So that comparison is not appropriate.

fleitz3• 12 years ago

It doesn't.

They invested $426 billion 2008 dollars and got back $438 billion 2014 dollars. Officially inflation was 9.7% so they lost about $20 billion.

protomyth• 12 years ago

"When Congress created TARP, it authorized up to $700 billion for the programs. That authority was later reduced to $475 billion. To date, a total of $426.3 billion has been disbursed under TARP. As of November 30, 2014, cumulative collections under TARP, together with Treasury’s additional proceeds from the sale of non-TARP shares of AIG6, have exceeded total disbursements by $14.0 billion7. Treasury estimates that the combined overall cost of TARP will be approximately $37.5 billion. These estimates assume that the budget for TARP housing programs will be disbursed in full and do not include Treasury’s additional proceeds from its non-TARP AIG shares."

http://www.treasury.gov/initiatives/financial-stability/repo...

Reading the press release is nice, but it does help to actually read the report to Congress.

prokes• 12 years ago

At the cost of creating moral hazard, the full impact of which has yet to be seen.

fleitz3• 12 years ago

What they fail to note is all the good that could have come from not doing TARP, what innovative services might have sprung up instead?

Sure, Detroit might be dead (isn't it already?) but there would also be a huge infrastructure for Tesla to buy on the cheap.

Imagine a world in which Tesla and other startups are the only car manufactures in the US? (Well, save for Ford which didn't need a bailout)

What sort of opportunities would there be for FinTech companies sans Goldman, et al? How many small businesses could have been started with $475 billion?

kolbe• 12 years ago

...because the Federal Reserve offered the real bailout. TARP's few hundred billion would be worth far less had the Fed not printed trillions, and used it to buy all of the banks' bad MBSs at above-market rates.

marze• 12 years ago

Doesn't the purchase of the bank's junky assets at above-market valuations go by the name "quantitative easing"? Is that what you are referring to?

vitobcn• 12 years ago

Probably, he's referring to this official GAO (Government Accountability Office) audit report [1] from 2011, which exposed the Fed secretly loaned 16 trillion USD (!!!) to big banks worldwide at 0% rates (afaik, currently fully unreturned).

Here are the top four [2]:

   Citigroup      - 2.5 T$
   Morgan Stanley - 2.0 T$
   Merrill Lynch  - 1.9 T$
   BOA            - 1.3 T$

Frankly, I'm surprised this didn't receive more attention from the media.

[1] http://www.gao.gov/new.items/d11696.pdf (Table 8, PDF page 144)

[2] http://www.sott.net/article/250592-Audit-of-the-Federal-Rese...

Animats• 12 years ago

Right. It's those low, low interest rates, and that banks are allowed to mark them up. If those low interest rates were only available, say, for FHA and VA loans, which bypass the banking system's markup, or for infrastructure projects, the effects would be different.

A lot of unnecessary M&A activity is powered by cheap loans. On the other hand, if conservative investments were returning a decent return, the VC industry wouldn't be awash with cash.

acd• 12 years ago

This is simply not true us as us citizens has not profited from this. The banks has been printing money like crazy and the American middle class has not gotten richer while the top 1% has gotten really rich.

Here is a graph from CNN about it http://money.cnn.com/2011/02/16/news/economy/middle_class/

at-fates-hands• 12 years ago

And yet, the US is producing more millionaires each year than every country except China. . .

https://www.bcgperspectives.com/content/articles/financial_i...

The total number of millionaire households (in U.S. dollar terms) reached 16.3 million in 2013, up strongly from 13.7 million in 2012 and representing 1.1 percent of all households globally. The U.S. had the highest number of millionaire households (7.1 million), as well as the highest number of new millionaires (1.1 million).

littletimmy2• 12 years ago

That's what the earlier post is getting at. There is a lot of wealth skew towards the top... so of course there are a lot more millionaires.

It is the common man who didn't see any benefit from TARP.

prostoalex• 12 years ago

This is strictly federal government revenues associated with TARP funds. In a way the middle class has benefited by not having their bank suddenly go down or the local factory shut down due to some giant Detroit automotive contract defaulting on its payment.

But strictly speaking, it's a Troubled Assets Relief Program, not Middle Class Enrichment Program, so not sure where those expectations come from.

adventured15• 12 years ago

The middle class got one of the world's largest bailouts in the form of record low mortgage rates. They were able to buy homes with cheap rates, and they were able to refinance with cheap rates; and that's still true even now, the homeowner bailout continues. The savings for the middle 50% of Americans is staggering. So yes, average Americans profited in a big way.

Further, all homeowners got bailed out via a multi-trillion dollar asset inflation program that re-inflated housing prices. If you own a house, you saw a massive benefit from that bailout.

antidaily• 12 years ago

That's not a bailout. Coupled with flat wages and rising costs of living, savings aren't exactly piling up. And home prices are expected to be pretty flat for the foreseeable future.

pjmorris• 12 years ago

I disagree about the 'middle class bailout'. Interest rates are lower, but house prices are higher (good for middle class wealth if you bought before the crisis, bad if you have to buy after the crisis - look at household formation since the crisis to see how that's working out). On balance, banks collect the same interest, and homeowners have less to spend on anything else.

littletimmy2• 12 years ago

The banks too profited handsomely from TARP, thereby creating a huge moral hazard. The government gave the banks money, which they used to make profits, AND then returned money to the government.

Let that sink in for a second, the banks sunk the economy, and the government helped them make huge profits.

rhino3692• 12 years ago

TARP didn't wipe out the massive losses the banks suffered because of financial crisis. It just allowed them to survive it. The banks who really fucked up were all sold, essentially at gunpoint, to banks who were still solvent. Those banks were sold for pennies on dollar compared to what they were priced at months before.

Of course, without government intervention, they'd get nothing in bankruptcy.

I think losing 95% of your investment is enough to avoid huge moral hazard.

Society benefits because letting them fail sinks the economy much further.

Zigurd• 12 years ago

The positive aspects of saving a banking system don't directly cancel out the negative aspects of creating moral hazard by doing it in a way that rewards TBTF banks.

There were multiple options for saving the US banking system, which was insolvent as a whole, since the supposedly not-insolvent banks would have gone down the tubes instantly had any of the larger insolvent banks been allowed to fail, due to their derivatives exposure and other counter-party risk.

For example, the banks could have been nationalized, and the charade of continuing large management bonuses could have been avoided.

What we got as a result of TARP and related bailout approaches is an unrepentant risky TBTF system that could explode again, and a compensation structure that fuels income inequality. Feh.

rational-future2• 12 years ago

You are assuming the banks that sold had different owners than the banks that bought them.

penrod• 12 years ago

It is no surprise that Treasury made a profit on its investments in troubled companies, since the fact of investing in them effectively rigged the market in their favor: If the government declares that it will not allow a company to fail, the company’s borrowing costs are reduced and it now has a competitive advantage over companies that do not qualify for government intervention.

Of course the qualifications for this special treatment were: being very big, being politically well-connected, and having taken stupid risks. So every well-run, medium sized bank that didn’t have an army of lobbyists got screwed. And now we see that our favorites have prospered and declare “profit!” while ignoring the red ink for everyone else in the economy.

rhino3692• 12 years ago

It's not just that they boosted the credibility of the banks.

The "toxic assets" that TARP bought weren't as bad as people feared. But the market wasn't buying them because nobody knew their true value. Everyone lost faith in the ratings agencies so it was chaos.

Small banks benefited from this as well. It stabilized the market for mortgage securities, which small banks had large exposure to. It solved the liquidity crunch so the banks could stay open.

If the big banks fail, it would take the small ones with them. It would also take a lot of good businesses with it. The whole economy runs on lines of credit.

adventured15• 12 years ago

The market would have bought them, at one point or another, exactly because there was value there (either at the time or eventually that realization would have been made, just as it had been so many times throughout US history that didn't require a program like TARP).

That process would have bankrupted nearly every major bank. Buying the toxic assets was an extreme bailout for the banks, that were carrying trillions in liabilities that suddenly went under. Most of the majors were completely insolvent.

remarkEon• 12 years ago

In principle I agree. It remains to be seen how much moral hazard this little excursion into the loan markets by the federal government creates.

One program that doesn't really get much attention in the media (maybe because it was more nuanced and complicated?) was the TALF program [1]. I did a summer internship in 2009 with the Federal Reserve Bank in New York and it really seemed like that program was their primary concern because it was much more directed at the private loan market with targeted loans at "normal" spreads (whatever that meant at the time...) To date, I guess, they've made ~$173m [2]. The design of TALF was wayyy different than TARP, both in scale and objective. At the time I was working on drilling down on the demographic data of who, exactly, was applying for TALF loans. Really interesting stuff.

Not sure we'll be able to actually understand the ramifications for a while.

[1] http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Lo... [2] http://blogs.wsj.com/economics/2013/01/15/treasury-turns-173...

nraynaud• 12 years ago

That's interesting, because there is a very fine line to walk between destroying the competition by distorting the market and deciding that the state shouldn't let a company die. At least the U.S. got out of all this pure capitalist makeup. We can now talk about what we allow in competitive markets.

marincounty• 12 years ago

Yea, now we can't stomp around and espouse how Capitalism doesn't need government oversite--Period! Personally, there's a part of me that wanted the banks to fail; and see what arose from the ashes, but that's another story. (Some banks like Jamie Dimon's bank didn't need or want the money). I think what bothered me about the whole process is the economy is better for some people--people who have assets, or have skills that are currently in vogue. The average dude just getting by, and relying on interest from their cd(because they can't afford to speculate anywhere in life) was not given a party gift in this recovery. There were a lot of smaller banks who weren't in trouble. They weren't in trouble because they were located in the right communities, and were very consertative. Meaning they only lent to people with a lot of equity(sure bets), gave very little interest on any financial instrument, always charged fees for eveything, counted on the fact that a lot of people just drop their money in the bank and never touch it, but are Very nice, and remember your birthday--Hello Bank of Marin. I think Obama foresaw the future and figured the only lasting gift he could give to the middle class and the poor was access to the health care system--even though they (the Republicicans) insisted on bringing in private Insurance companies?

adventured15• 12 years ago

The US wasn't in purely capitalistic makeup to begin with. The US hasn't been a Capitalist country for a century. it hasn't even been a mixed economy for 40 or 50 years. America in 1890 was a Capitalist country.

The US is a hyper regulated, highly taxed welfare state. The US economy carries more regulations per capita than any other country on earth, and it passes more new regulations per year than anyone else.

You can't call a country in which the total government system extracts 40% of the economy - effectively a government system larger than the entire economy of Japan - a Capitalist country. It's not even close.

Nor can you call the world's largest welfare state, with the largest entitlement programs, a Capitalist country.

Where's the Capitalism? Capitalism requires, at a minimum, very low taxation, few economic regulations, strong protections on property rights, low friction for trade, and very little government intervention into the economy. The US has almost the opposite of that and has for a very long time.

lettergram• 12 years ago

Although I agree with you for the most part, companies such as Capital One or Discover who did not have intervention grew much faster and took much more of the market than other banks. Further, Ford did exceptionally well when the other automakers were having trouble and I was thoroughly impressed.

seanmccann• 12 years ago

Discover got $1.2 billion. Capital one got $3.6 billion. Both are a small fraction of the $25 billion Wells Fargo and Citigroup got.

lurchpop• 12 years ago

As others have said, moral hazard. This is especially important as they're set up for the next bailout will to be a "bail-in" where bank accounts will be debited directly through FDIC-insured accounts. I doubt those losses will get reimbursed to savers.

erikpukinskis• 12 years ago

3% over six years? I would say that qualifies as losing money. It's not even keeping up with inflation (10% in the same period).

dodyg• 12 years ago

The US spends 500 billion dollars on defense every year but the biggest threat to its security is actually its banking system.

rational-future2• 12 years ago

The international banking system was the biggest threat to the freedoms of the colonies from before the Revolution until 1913. With the Federal Reserve Act of 1913 the banksters gained full control of the country ...

adventured15• 12 years ago

Full control of the global economy actually, courtesy of what then happened post-WW2 with the establishment of the global FRN standard.

They can crash the Soviet Union, tank modern Russia, break the pound, prop up Japan, build out trillions in manufacturing in China, encourage $20 trillion in new debt creation in China, crash oil with a stronger dollar, nominally inflate stock markets with asset inflation programs, rig the commodity market and libor, squeeze countries into default via currency or bond manipulation, and so on.

jokoon• 12 years ago

so if I understand it, TARP was not just money given to banks (as michael moore seemed to explain it in his documentary), it was a loan made by the government to the big banks.

How did banks manage to pay back this loan ? What kind of condition did the government give ?

higherpurpose• 12 years ago

I'm willing to bet this isn't actually true and is misleading. The companies that got the bailout got other tax breaks and I think they got more money through other programs as well, which they then used to "pay back TARP". I really, really doubt the government came out net-positive with the loan.

puppetmaster3• 12 years ago

lol. Welcome to a 1984 press release (for the stiff above the neck: wheat production, up, 18 %).

percept• 12 years ago

Can haz dividend?

transfire• 12 years ago

Give me a break. TARP was just cover for the real bailout.

cnntrolls• 12 years ago

So what you're telling me is, adjusted for inflation, the government lost billions.

http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=425.00&year1=20...

Nice spin though. Seems to have duped most of the 1337 h4x0rz here. Tell us CNN, how much of that QE* money are we getting back?

randomname2• 12 years ago

The real windfall for the US has been the over $200 billion in bank settlements since 2008 in exchange for not jailing any bankers.

imaginenore• 12 years ago

$15.3B profit on $426B investment is 3.59% over 6 years.

If they invested that money in S&P500, they would get 130% back.

kuni-toko-tachi• 12 years ago

The nominal amount of profit is meaningless without reference to the value of the units relative to actual goods and services. In other words, what is the value of the currency today vs then?

The idea that the government could just print money and solve the problem is naive. The costs of that bailout are reflected in a lower living standard and massive government debt as well as further imbalances.

timtas• 12 years ago

From a guy who wrote a 768 page book [1] about this:

"The 'small profit', along with most of the so-called 'recovery' of Uncle Sam’s $426 billion initial investment, was ground out of the backs of America’s savers and depositors; or it was scalped from the massive financial bubbles the Fed has generated in the Wall Street casino." [2]

[1] http://www.amazon.com/The-Great-Deformation-Corruption-Capit...

[2] http://davidstockmanscontracorner.com/the-greater-abominatio...

U.S. ends TARP with $15.3B profit

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