BAILOUT FUNDS: A LOAN NOT A GIFT

May 20, 2010

In October 2008 Congress passed the Emergency Economic Stabilization Act of 2008.  The act created a $700 billion Troubled Asset Relief Program (TARP) aimed at preventing a meltdown of the banking system.  Some TARP funds were subsequently used for purposes outside the financial industry, but most were used to purchase preferred stock in banks to shore up bank capital as a buffer against bad assets.

These investments in preferred stock can be sold later under better circumstances and may even turn a profit for taxpayers, says Robert McTeer, a distinguished fellow with the National Center for Policy Analysis. 

Support of the banking system through TARP has been successful and cost effective, says McTeer.  Unlike the savings and loan crisis in the late 1980s -- when taxpayers ultimately lost $123.8 billion due to the closing of insolvent thrift institutions -- government investment in preferred stock is proving to be profitable to the Treasury and taxpayer.  In fact, the Treasury earned about 18 percent on the preferred stock and warrants of the larger banks that repaid ahead of schedule.  That return has diminished as smaller banks repay, but remains positive: 

  • Approximately $135 billion of $205 billion in preferred stock purchased by the Treasury has been repurchased by banks so far, the TARP Congressional Oversight Panel reported in April 2010.
  • The government will likely net about $2 billion in profits, the Congressional Budget Office (CBO) estimated in March 2010.
  • The government will net an additional $5 billion from the repayment of supplementary support to Citigroup and Bank of America, according to the CBO. 

Banks were not the only organizations to receive financial assistance, however.  Loans were also made to the American International Group, Inc. (AIG) and American car companies, General Motors and Chrysler: 

  • The CBO currently estimates that assistance to AIG and the automotive industry will result in a net cost to the government of $36 billion and $34 billion, respectively.
  • But these losses are far from certain; the government owns almost 80 percent of the stock of AIG, which still has many assets and, given time, may well return to profitability.
  • In addition, General Motors has already repaid its $6.7 billion loan.
  • The federal government also owns about 60 percent of General Motors' shares, which the government will eventually be able to sell, potentially at a profit. 

Source: Robert McTeer, "TARP: A Loan Not a Gift," National Center for Policy Analysis, May 20, Brief Analysis No. 705, 2010. 

For text:

http://www.ncpa.org/pub/ba705 

 

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