The troubled asset Relief Program, the controversial $700 billion package passed last fall in the wake of the Lehman Brothers collapse, wasn't pitched as a bailout. Rather, then–Treasury secretary Henry Paulson presented it as an opportunity for the taxpayer to profit by making investments in name-brand companies. Indeed, during the Great Panic of 2008, American taxpayers reluctantly made a series of very expensive investments in blue-chip companies—Fannie Mae, AIG, General Motors. But it's been hard to see the returns of these efforts, since they were designed to avert a total meltdown. Placing a value on an outcome that's been avoided is the sort of counterfactual exercise ice-blooded economists process with alacrity, but is harder for emotional humans to deal with.
And yet. As we approach the anniversary of the Great Panic, some of the investments are clearly paying off in ways you and I can comprehend. The final cost of TARP will be a fraction of the original $700 billion, and taxpayers are turning a profit from its central component: the Capital Purchase Program.
Paulson's initial efforts, continued by the Wall Street sharpies who succeeded him, had the characteristics of an investment fund. Under the CPP, the government would lend money to banks at 5 percent, through the purchase of preferred shares. As investors in troubled companies do, the government demanded an extra ounce of flesh: warrants, which are the right to buy a stock at a set price. It's like lending money to a financially troubled friend to buy a house, but getting ownership of the kitchen.
The spreadsheets at financialstability.gov document the status of the 667 investments, worth $204.4 billion, made under the CPP. Morgan Stanley, which borrowed $10 billion in October 2008, paid back the cash in June and purchased the warrants for $950 million on Aug. 12, giving taxpayers a 12.7 percent return, according to SNL Financial. For the 22 companies that have bought back shares and warrants, the taxpayer received an annualized return of 17.5 percent—better than most hedge funds have done lately. (Another 15 have repaid part or all of the principal.) Since many of the largest financial institutions have left the program, the 37 "exits" represent 34 percent of the total cash initially disbursed. The bottom line: taxpayers have received $70.3 billion in principal, plus about $10 billion in dividends and warrant payments. This money goes back into the Treasury's general fund, while the CPP continues to dole out cash to little banks. On Aug. 21, AmFirst Financial Services in McCook, Neb., received $5 million. Today, 633 banks owe $134.2 billion.
Investors have seen other returns. Since the Treasury Department in July converted the $25 billion CPP loan to Citi into common stock, at $3.25 a share, the U.S. taxpayer now holds 7.69 billion shares of the once mighty bank. As of Aug. 26, thanks to the rallying market, taxpayers were sitting on a $10.52 billion paper gain.
We can't extrapolate the early returns to the broader pool, due to what economists call adverse selection. In English, it means the healthiest banks fled like thieves (note to flacks: that's hyperbole!) once they could raise private capital, leaving behind the weaker institutions. In November, the Treasury will issue a report placing a value on the remaining deals. Of course, there's more to TARP than the CPP. Some components, like the $22 billion pledged to help banks modify mortgages, weren't intended to produce a financial return. Other efforts, like $79 billion in loans to automakers, and nearly $70 billion made available to AIG, are less likely to yield returns.
Given the results of the central-bank bailout thus far, Herb Allison, the former TIAA-CREF CEO who was tapped to run TARP, notes that "it's quite possible we'll have a positive return on the CPP program as a whole."
Regardless, the CPP —combined with all the other stabilization efforts—has become less of a political and financial liability than it was last fall. In late August, the Office of Management and Budget said the lower-than-expected cost of bailing out the financial system—including the money paid back from the CPP—meant the 2009 fiscal deficit would be $1.58 trillion, $262 billion less than the prior estimate of $1.84 trillion. Lee Sachs, counselor to the Treasury secretary, invokes the MasterCard ad in weighing the true yield. "Dividends: 5 percent; equity warrants: 2 percent. Financial system not going into total abyss: priceless."
That's one way of looking at it. But plenty of banks are still in trouble. And regardless of the ultimate performance of the CPP, taxpayers will be out a large chunk of cash due to the incompetence and greed of bankers and the nonfeasance of regulators. As they say on Wall Street, the returns are better than a poke in the eye—which is what this sad chapter in American capitalism has been.