US Treasury announces profits on bailouts

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Treasury Secretary Timothy Geithner speaks during a news conference on the state of financial reform at the Treasury Department in Washington. Photo - Yuri Gripas/Reuters

The bailout money spent by the Obama administration to prop up banks and other companies, as well struggling homeowners, devastated by the ‘Great Recession’ would probably generate a profit, according to the latest federal projections.

Over the next 10 years, the taxpayer-funded bailouts could produce as much as $163 billion in profits, in a best-case scenario, from repayments, stock sales, dividends and interest paid by banking and insurance firms, auto companies and mortgage finance companies. This is a stark turnaround from predictions of hundreds of billions in losses in the immediate aftermath of the unprecedented aid, starting at the end of Bush administration.

The US Treasury Department said many programs that the Federal Reserve and banking authorities implemented during the darkest hours of the 2007-2009 financial crisis will end up making a profit for taxpayers.

Senior Treasury officials said they wanted to dispel misperceptions that the controversial bailouts, including the $700-billion Troubled Asset Relief Program, have been ineffective and costly.

“Collectively, these programmes — carried out by both Republican and Democratic administrations — were effective in preventing the collapse of the financial system, in restarting economic growth and in restoring access to credit and capital,” Timothy Massad, Treasury’s assistant secretary for financial stability, wrote in a blog post Friday.

TARP

Reports suggest Troubled Asset Relief Program or TARP provided money to more than 700 banks has already realised a $19bn profit. TARP had made the small profit on about $205 billion in the money invested in banks, most of which has repaid money, along with dividends, and have bought back stock warrants given to the government.

The US Treasury trumpeted for months that it already made a profit of about $205 billion in TARP money invested in banks, along with dividends, and have bought back stock warrants given to the government.

A senior Treasury official, who spoke on condition of anonymity, said the department wanted to get the word out about the success of financial bailout before myths developed about it.

Besides TARP’s possible profits, the Treasury’s new bailout estimate includes the broader rescue of insurance leviathan American International Group Inc. and Fannie and Freddie, as well as the Federal Reserve‘s dramatic expansion of its balance sheet through purchases of mortgage-backed securities and other investments.

It is largely the return on those Federal Reserve investments that will lead to the overall profit of the bailout programmes, Treasury officials said.

The bailout of carmakers General Motors and and Chrysler – which was also part of Tarp, cost $22bn, the Treasury said. “But the cost of a disorderly liquidation to families and businesses across the country that rely on the auto industry would have been far higher,” it added.

The US Treasury still owns more than 30% of GM’s ordinary shares.

In the end, the Treasury expects to make $22bn from Tarp’s bank bailouts and $2bn on Tarp’s loans to restart the credit markets, offsetting the auto bailouts.

Earlier this week, the Treasury scaled back the ultimate estimated cost of the centerpiece program, the Troubled Asset Relief Program, or TARP, to around $60 billion from a previous estimate of $68 billion.

However, TARP is still projected to lose money because of the GM and Chrysler bailouts, as well as the administration’s mortgage assistance programs. The Congressional Budget Office last month estimated that TARP would lose $32 billion, an improvement from the $34-billion loss projected in December.

Friday’s report said that “overall, the government is now expected to at least break even on its financial stability programs and may realize a positive return.” One chart showed $207 billion in total profits from some programs offsetting losses of as little as $44 billion in others.

Senior Treasury officials cautioned, though, that the projections were based on the recovery of the economy and the housing market. They hesitated to highlight the specific dollar figures and said they only felt comfortable saying a profit was likely.

“Although the economy is getting stronger, we have a long way to go to fully repair the damage the crisis has left behind,” the Treasury said. “We are still living with the broader economic cost of the crisis, which can be seen in high unemployment.”

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