Treasury Reaps Big Returns on TARP Investments

This article was originally published by the Fiscal Times on Thursday, Feb. 11, 2010.

The numbers quell criticism that the bailout would be too costly to taxpayers.

By Katherine Reynolds Lewis

The Treasury has recouped nearly a third of the $545 billion it invested to help rescue U.S. financial institutions and in some cases has reaped substantial returns on those investments.



The strong showing is preliminary, as much of the government’s investment in banks is still outstanding. But it contrasts sharply with widespread criticism that the government bailout of Wall Street was excessive and costly to taxpayers.

The Treasury, for example, made a nearly 24 percent return on its investment in American Express Co., 20 percent on its rescue of Goldman Sachs Group and nearly 17 percent from Morgan Stanley Group, according to an analysis of Treasury data prepared by Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette and an expert on the government’s response to the financial crisis.

Overall, the Treasury has realized more than $15 billion in dividends and equity growth in its investments in the once-troubled financial institutions, according to Treasury Department figures.

"The perception that most of the public had, that this was money poured down a rat hole, was always wrong," said Douglas J. Elliott, a fellow at the Brookings Institution. "We've gotten more back than we expected because the financial sector and even the economy turned around a lot faster than we thought."

The Troubled Asset Relief Program (TARP), enacted in 2008 at the height of the sub-prime mortgage financial crisis, allowed the government to intervene and stabilize many tottering banks and financial institutions by infusing cash when private capital markets dried up. Critics decried the government bailout as an excessive rescue of Wall Street fat cats at the expense of taxpayers and other sectors of the economy, and the Treasury's handling of the program remains a major point of contention on Capitol Hill.

To be sure, the government's $70 billion investment in American International Group (AIG) and the $85 billion spent to bail out General Motors Corp. and Chrysler Group LLC are unlikely ever to turn a profit, leaving the overall TARP program in the hole. Moreover, the healthiest banks repaid TARP first, so that bank investments that remain in the program aren't likely to be as profitable. The combination of an improving economy and limits on executive compensation for TARP recipients has encouraged banks to repay the funds as soon as they are financially able, even when it means taking a loss.

"The fact that we're talking about positive returns is a sign that things have stabilized more than people thought possible, particularly in late '08 or early '09," said David Min, associate director for financial markets policy at the Center for American Progress. "To do a victory lap now would be making the same mistake many banks made, which is focusing on the short term at the expense of long-term health."

The revenue flowing into the TARP program is so robust that President Barack Obama proposed using some funds to make small business loans. "I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat," Obama said in his State of the Union address last month.

This scenario would have seemed unimaginable to many in the fall of 2008, when the world financial markets seemed one nervous trader away from collapse, and the government hurriedly put together the TARP program, initially estimated to cost $700 billion but more recently pegged by Treasury at $545 billion, thanks in part to faster-than-expected improvement in the financial sector.

Recent news reports highlighted the Federal Reserve's most profitable year ever in 2009, as the central bank earned $45 billion on its loans and trading of securities. The Treasury earnings are different, coming directly from the government rescue of the financial sector.

Currently, the bulk of the government's TARP investments falls into seven programs. In descending order of dollar value, they are the Capital Purchase Program (CPP), the auto industry financing program, the AIG bailout, the consumer and business lending initiative, the Home Affordable Modification Program, the Targeted Investment Program (TIP), which is now fully repaid, and the public-private investment program.

So far, Treasury has been repaid $161.9 billion of its initial investments through CPP and TIP, the two TARP vehicles for investing in banks. On top of that, the Treasury has received a return on bank investments of $11.3 billion in dividends and $4 billion in stock warrant proceeds, for a total of $15.3 billion, according to figures the Treasury makes available.

Under the CPP, Treasury bought $205 billion of preferred shares in more than 500 financial institutions, which pay a five percent dividend for the first five years and nine percent a year thereafter. The government also received warrants, which give Treasury the right to buy common stock at a set price. Thus, Treasury receives three forms of revenue from banks participating in this program: (1) repayment of the initial investment, (2) dividends and (3) proceeds from warrant auctions or stock sales, after first redeeming the warrants for stock.

Treasury received a 12 percent rate of return on an annualized basis from the 10 major financial institutions under CPP that have repaid the government and have no outstanding stock warrants, according to an analysis performed for The Fiscal Times by Wilson.

Treasury made 23.4 percent on American Express, 20 percent on Goldman Sachs, 16.8 percent on Morgan Stanley, 11.1 percent on Northern Trust Corp., 10.2 percent on Bank of New York Mellon Corp., 9.2 percent on State Street Corp., 8.8 percent on U.S. Bancorp, 7.8 percent on BB&T Corp., 6.7 percent on Capital One Financial Corp. and 6.4 percent on JP Morgan Chase & Co., according to Wilson’s analysis.

In December, Wells Fargo & Co. repaid its $25 billion CPP investment, on top of $2.7 billion in dividends, and Bank of America Corp. repaid the $45 billion it received through CPP and TIP, after paying $1.4 billion in dividends. Wells Fargo is likely to repurchase its warrants for roughly $910 million, and the Bank of America warrants should fetch approximately $1.3 billion at auction, Wilson estimated. Adding those estimates to the total proceeds would boost Treasury's profits to about $17.5 billion.

"We're doing better than expected because many of the banks repaid TARP sooner than expected," Wilson said. "Whenever anyone pays you back in full with interest, you're never going to lose money."

The Treasury has recouped nearly a third of the $545 billion it invested to help rescue U.S. financial institutions and in some cases has reaped substantial returns on those investments.

The strong showing is preliminary, as much of the government’s investment in banks is still outstanding. But it contrasts sharply with widespread criticism that the government bailout of Wall Street was excessive and costly to taxpayers.

The Treasury, for example, made a nearly 24 percent return on its investment in American Express Co., 20 percent on its rescue of Goldman Sachs Group and nearly 17 percent from Morgan Stanley Group, according to an analysis of Treasury data prepared by Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette and an expert on the government’s response to the financial crisis.

Overall, the Treasury has realized more than $15 billion in dividends and equity growth in its investments in the once-troubled financial institutions, according to Treasury Department figures.

"The perception that most of the public had, that this was money poured down a rat hole, was always wrong," said Douglas J. Elliott, a fellow at the Brookings Institution. "We've gotten more back than we expected because the financial sector and even the economy turned around a lot faster than we thought."

The Troubled Asset Relief Program (TARP), enacted in 2008 at the height of the sub-prime mortgage financial crisis, allowed the government to intervene and stabilize many tottering banks and financial institutions by infusing cash when private capital markets dried up. Critics decried the government bailout as an excessive rescue of Wall Street fat cats at the expense of taxpayers and other sectors of the economy, and the Treasury's handling of the program remains a major point of contention on Capitol Hill.

To be sure, the government's $70 billion investment in American International Group (AIG) and the $85 billion spent to bail out General Motors Corp. and Chrysler Group LLC are unlikely ever to turn a profit, leaving the overall TARP program in the hole. Moreover, the healthiest banks repaid TARP first, so that bank investments that remain in the program aren't likely to be as profitable. The combination of an improving economy and limits on executive compensation for TARP recipients has encouraged banks to repay the funds as soon as they are financially able, even when it means taking a loss.

"The fact that we're talking about positive returns is a sign that things have stabilized more than people thought possible, particularly in late '08 or early '09," said David Min, associate director for financial markets policy at the Center for American Progress. "To do a victory lap now would be making the same mistake many banks made, which is focusing on the short term at the expense of long-term health."

The revenue flowing into the TARP program is so robust that President Barack Obama proposed using some funds to make small business loans. "I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat," Obama said in his State of the Union address last month.

This scenario would have seemed unimaginable to many in the fall of 2008, when the world financial markets seemed one nervous trader away from collapse, and the government hurriedly put together the TARP program, initially estimated to cost $700 billion but more recently pegged by Treasury at $545 billion, thanks in part to faster-than-expected improvement in the financial sector.

Recent news reports highlighted the Federal Reserve's most profitable year ever in 2009, as the central bank earned $45 billion on its loans and trading of securities. The Treasury earnings are different, coming directly from the government rescue of the financial sector.

Currently, the bulk of the government's TARP investments falls into seven programs. In descending order of dollar value, they are the Capital Purchase Program (CPP), the auto industry financing program, the AIG bailout, the consumer and business lending initiative, the Home Affordable Modification Program, the Targeted Investment Program (TIP), which is now fully repaid, and the public-private investment program.

So far, Treasury has been repaid $161.9 billion of its initial investments through CPP and TIP, the two TARP vehicles for investing in banks. On top of that, the Treasury has received a return on bank investments of $11.3 billion in dividends and $4 billion in stock warrant proceeds, for a total of $15.3 billion, according to figures the Treasury makes available.

Under the CPP, Treasury bought $205 billion of preferred shares in more than 500 financial institutions, which pay a five percent dividend for the first five years and nine percent a year thereafter. The government also received warrants, which give Treasury the right to buy common stock at a set price. Thus, Treasury receives three forms of revenue from banks participating in this program: (1) repayment of the initial investment, (2) dividends and (3) proceeds from warrant auctions or stock sales, after first redeeming the warrants for stock.

Treasury received a 12 percent rate of return on an annualized basis from the 10 major financial institutions under CPP that have repaid the government and have no outstanding stock warrants, according to an analysis performed for The Fiscal Times by Wilson.

Treasury made 23.4 percent on American Express, 20 percent on Goldman Sachs, 16.8 percent on Morgan Stanley, 11.1 percent on Northern Trust Corp., 10.2 percent on Bank of New York Mellon Corp., 9.2 percent on State Street Corp., 8.8 percent on U.S. Bancorp, 7.8 percent on BB&T Corp., 6.7 percent on Capital One Financial Corp. and 6.4 percent on JP Morgan Chase & Co., according to Wilson’s analysis.

In December, Wells Fargo & Co. repaid its $25 billion CPP investment, on top of $2.7 billion in dividends, and Bank of America Corp. repaid the $45 billion it received through CPP and TIP, after paying $1.4 billion in dividends. Wells Fargo is likely to repurchase its warrants for roughly $910 million, and the Bank of America warrants should fetch approximately $1.3 billion at auction, Wilson estimated. Adding those estimates to the total proceeds would boost Treasury's profits to about $17.5 billion.

"We're doing better than expected because many of the banks repaid TARP sooner than expected," Wilson said. "Whenever anyone pays you back in full with interest, you're never going to lose money."