NYT: As Big Banks Repay Bailout Money, U.S. Sees a Profit

by Bruce Webb

Big Banks Repay: 15% interest earned

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business

People who are wringing their hands at Barovksy’s $37 trillion dollar in guarantees outstanding figure need to get a grip. Much of that money has not been extended and at this stage probably won’t be, and much that has is backed by assets with real if undeterminable value. (The notion that something has exactly the value of its current price in the market is just a byproduct of EMH magical thinking). More:

American taxpayers could still collect additional profits on their investments in two other big banks that have repaid their preferred stock but not their warrants: JPMorgan Chase and Capital One. They are expected to yield over $3.1 billion in gains for the Treasury in the next month or so, although the full tally will depend on how much they will pay to buy back their warrants.

And the government is owed about $6.2 billion in interest payments from banks that have not yet repaid their federal money.

But all the profits taxpayers have won could still be wiped out by two deeply troubled institutions. Both Citigroup and Bank of America are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove “toxic” because they cannot attract buyers, they could leave large holes in the banks’ balance sheets.

Neither bank is ready to repay its bailout money anytime soon, even though the banks’ stock prices have surged in the last month, leaving the government sitting on paper profits of about $18 billion between them.

Given that just about a third of our record budget deficit is the direct result of outlays from TARP, the fact that we are getting much of that money back with double digit interest should, but probably won’t, give some of those bailout/stimulus/Obama haters a little pause.

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