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Payback: U.S. sees bailout profits

TARP earns about $4 billion as big banks repay loans. But financial problems lurking at BofA, Citigroup could still harm.

By Zachery Kouwe
New York Times

Nearly a year after the federal rescue of the nation's biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent interest annually, according to calculations compiled for The New York Times.

That does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

And all the profits taxpayers have won could still be wiped out by two troubled institutions. Both Bank of America and Citigroup are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove “toxic” because they cannot attract buyers, they could leave large holes in the banks' balance sheets.

Neither bank is ready to repay its bailout money anytime soon, even though their stock prices have surged in the last month, leaving the government sitting on paper profits of about $18 billion between them.

But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.

“The taxpayers want their money back, and they want the government out of our banking system,” Rep. Jeb Hensarling, R-Texas, a member of the Congressional Oversight Panel examining TARP, said in an interview.

Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages.

Bank stocks began teetering after Lehman Brothers collapsed and the government rescued AIG, and fear gripped the financial industry around the world.

American taxpayers were told they would eventually make a modest return from these investments, including a 5 percent quarterly dividend on the banks' preferred shares and warrants to buy stock in the banks at a set price over 10 years.

But critics at the time warned that taxpayers might not see any profits and in fact could lose much of its investment if the assets they were buying turned out to be worthless over time.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Rep. Mac Thornberry, R-Texas, said: “$700 billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, the experiment is more than paying off.

The government has taken profits of about $1.4 billion on its investment in Goldman, $1.3 billion on Morgan and $414 million on American Express. The five other banks that repaid the government – Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and Winston-Salem-based BB&T – each brought in between $100 million and $334 million in profit.

The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.

But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

American taxpayers could still collect additional profits on their investments in two other big banks that have repaid their preferred stock but not their warrants: JPMorgan Chase and Capital One Financial. They are expected to yield over $3.1 billion in gains for the Treasury in the next month or so, although the full tally will depend on how much they will pay to buy back their warrants.

And the government is owed about $6.2 billion in interest payments from banks that have not yet repaid their federal money.

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