Loss On TARP Only $25 Billion, The Possibility Of A Profit

The Congressional Budget Office has been given the task to report on the state of the TARP fund which was created primarily to bail out financial firms crippled by the credit crisis. The most recent report, based on figures compiled as of November 18th, projects the total loss on the program will be only $25 billion. As the report concludes, “Clearly, it was not apparent when the TARP was created two years ago that the cost would turn out to be this low.”

Older CBO estimates were much grimmer. The projection for the loss in an analysis completed in August was $66 billion. The March figure was $109 billion.

The reason for the improvement is that the companies in which TARP funds were invested performed well. The government program usually got equity and debt in the firms it aided and often received convertible securities as well.

The first large return on the fund’s investment came as the banking industry rose like Lazarus. Banks more than offset the damage done by mortgage-backed derivatives with strong investment banking and trading revenue.  Companies such as Goldman Sachs Group (NYSE: GS) paid the government back quickly. Banks which appeared to be permanently crippled when TARP was created in October 2008, such as Bank of America (NYSE: BAC), have had improved fortunes. The TARP fund returns on these investments was impressive.

The bank industry recovery was followed by a successful restructuring of AIG (NYSE: AIG), which was able to sell a number of divisions and take its AIA unit in Asia public. And then GM’s public offering was done at a price which allowed the government to recoup most of its investment in America’s No.1 car company.

A great deal of the improvement in the TARP fund’s return is “on paper.” It has not sold all of its investment in GM. Several medium-sized financial firms have not returned their money and the rebuilding of AIG is not done.

The forecast for estimates of TARP losses gets smaller with each report, and given the assets still owned by the fund and the rate at which many of them have appreciated, it is  possible that the TARP fund could end up with a profit.

TARP, once viewed as a desperate way to save the financial world and one on which the government believed it would lose hundreds of billions of dollars, may be the best investment the US has made in the private sector since the crash began in the fall of 2008.

Douglas A. McIntyre