The Troubled Asset Repurchase Program, the controversial $700 billion package passed in the heat of last fall's presidential election campaign, wasn't presented as a bailout of a failed system. Rather, then-Treasury Secretary Henry Paulson and his allies touted 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 and Freddie Mac, the insurer AIG, General Motors. Since these bailouts were designed to halt failure rather than stimulate growth, the return on most of these efforts has been largely intangible.
And yet. As we approach the one-year anniversary of the Panic of 2008, it's clear that the actual cost of the TARP will be a fraction of the original $700 billion estimate and that taxpayers are even turning a profit from the central component of the package. The initial effort that Paulson began, and that his successors in the Obama administration continued, had the characteristics of an investment fund. Under the Capital Purchase Program, the government would borrow from the public at low rates—1 percent or so per year—and lend the money to banks at 5 percent, through the purchase of preferred shares. As investors in troubled companies do, the government demanded something extra: warrants, which are the right to buy a stock at a set price. It's kind of like lending money to someone to buy a house but getting ownership of the basement as part of the deal.
The exhaustive spreadsheets at financialstability.gov document the status of the 667 investments made under CPP since last fall. To date, 21 institutions have repaid the principal amount and repurchased the warrants, and 15 more have repaid the principal. Morgan Stanley, which borrowed $10 billion in October 2008, redeemed the preferred shares in June and purchased the warrants for $950 million on Aug. 12, giving taxpayers a return of 12.7 percent, according to SNL Financial. For the 21 companies that bought back the shares and the warrants, the taxpayer received an annualized return of 17.5 percent—which is better than most hedge funds have done in the past year. Since many of the largest financial institutions raised private capital to substitute for government capital, the 36 "exits"—a tiny fraction of the transactions—represent 34 percent of the total. The bottom line: Taxpayers put $204.4 billion into the banks through CPP and have received $70.2 billion in principal, plus about $10 billion in dividends and warrant payments. The repaid money goes back into Treasury's general fund, while a small amount has been put back to work. On Aug. 21, AmFirst Financial Services in McCook, Neb., received $5 million from the CPP. Today, 633 banks still owe the Treasury $134.2 billion.
Investors have seen other returns from the CPP. Treasury in July converted the initial $25 billion CPP loan to Citi into common stock, at a price of $3.25 a share. The U.S. taxpayer now holds 7.69 billion shares. Given its close Thursday at $5.05, taxpayers have reaped a $13.8 billion paper gain from this investment—a 55 percent return in about a month.
Officials warn that we can't extrapolate the early returns to the broader pool, because of what economists call adverse selection. In English, it means the healthiest banks paid back as soon as they could raise private capital, leaving behind the weaker institutions that may be less likely to pay back in full. We'll get a better sense in November, when Treasury places a formal value on the remaining investments.
Of course, there's more to the TARP than the CPP. (Scroll down through this spreadsheet to see the full details.) Some of that is simply spending, such as $22 billion for home-mortgage modification, never intended to get a return. Others components were designed to produce a return, but are less likely to do so in the near future—loans to automakers ($79.966 billion, of which $2.14 billion has been paid back) and the nearly $70 billion in funding made available to insurer AIG.
Given the returns thus far, Herb Allison, the former CEO of TIAA-CREF who was tapped by Timothy Geithner to run the TARP, notes that "it's quite possible we'll have a positive return on the CPP program as a whole." That's possible.
Even if doesn't, the program—combined with all the other stabilization efforts—has become less of a political and financial liability than it was last fall. In this climate, a 5 percent yield on lending is quite good. The exits—the cash coming back—reduces the amount we have to borrow. In late August, the Office of Management and Budget said the lower expected cost of bailing out the financial system 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 a 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. Plenty of banks are still troubled, with a few failing each week. There were more productive uses for those funds. And regardless of the ultimate performance of the CPP, taxpayers will be out some large chunk of cash because of the incompetence and greed of bankers and the nonfeasance of regulators charged with overseeing them. Still, as they say on Wall Street, the returns are better than a poke in the eye—which is what this sad chapter in the history of American capitalism has been.
A version of this article also appears in this week's issue of Newsweek.
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