Bailouts exceed hopes for some
Controversial decision may have shrunk losses
WASHINGTON – Almost three years after a series of government bailouts began, what many feared would be a deep black hole for taxpayer money isn’t looking nearly so dark.
The brighter picture is highlighted by the outlook for the bailouts’ centerpiece – the $700 billion Troubled Asset Relief Program.
“It’s turning out to cost one heck of a lot less than what we all thought at the beginning,” said Ted Kaufman, a former U.S. senator from Delaware who heads the congressionally appointed panel overseeing TARP.
In mid-2009, the program was projected to lose as much as $341 billion. That’s been reduced to $25 billion – partly because of the controversial decision to pump much of the TARP money into banks instead of launching a large-scale purchase of securities backed by toxic subprime mortgages.
There is now broad agreement that the bailouts worked, stabilizing the financial system and preventing an even deeper crisis.
Still, many people are worried about the long-term effects of the government actions. They said that in demonstrating a belief that some companies were too big to fail, the government set a dangerous precedent, opening the door to future crises.
Housing finance giants Fannie Mae and Freddie Mac combined have consumed $150 billion in taxpayer money so far.
“We’re not going to recoup those losses,” said Rep. Patrick McHenry, R-N.C., chairman of the House Oversight and Government Reform subcommittee monitoring the bailouts. “It’s extraordinary, just absolutely extraordinary.”
Fannie and Freddie, which the Obama administration recently proposed to shut down, are the main reason most recent estimates of losses for all the various bailout efforts range from $238 billion to $380 billion.
But Treasury officials think those estimates might be too high. They said the cost of all the financial interventions is likely to be less than $140 billion, or 1 percent of the United States’ $14 trillion annual economic output.
Government intervention in the financial system expanded rapidly after the Federal Reserve decided in March 2008 to provide a $30 billion line of credit to engineer the sale of investment bank Bear Stearns Cos.
Hundreds of billions of dollars from TARP, the U.S. Treasury and the Fed were funneled into banks, Wall Street financial institutions and the auto industry as the recession deepened and as the credit crisis and a pile of soon-worthless securities threatened the worldwide financial structure.
The bleak prospects for recouping taxpayer funds, though, began to improve even though jobs evaporated and unemployment rates soared.
Banks have repaid nearly all the $245 billion they received, and the Treasury Department estimates that interest and dividends on those cash infusions ultimately will give taxpayers a $20 billion profit.
Last year’s highly successful stock offering by General Motors Co. means losses from its rescue, along with losses from rescuing fellow automaker Chrysler and the two companies’ financing arms, are projected to be $19 billion – much less than what was anticipated when the government pumped about $80 billion into the auto industry.
And a rise in the stock price of worldwide insurer American International Group Inc. as it sells many of its assets has reduced the estimated taxpayer cost to $14 billion on financial aid totaling about $125 billion. The New York company has vowed to pay it all back.
A study last year by Mark Zandi, chief economist at Moody’s Analytics, and Alan Blinder, a Princeton economist and former Fed governor, concluded that TARP “has been a substantial success.”
Zandi said the cash injections were necessary to stem the marketwide panic. Because TARP funds were not used to make large-scale purchases of toxic assets, which were riskier investments that it would have had to hold longer, the program was able to recover much of its money sooner.
The toxic assets held by Fannie and Freddie are leading to such huge losses that their bailouts could cost as much as $363 billion through 2013 – but only if there is a deep, second housing recession, according to projections last year by the Federal Housing Finance Agency, which oversees Fannie and Freddie.
A stronger housing recovery could mean Fannie and Freddie would need only about $71 billion more, the report said. Zandi said it’s possible those bailouts also could cost less than anticipated. “The script on Fannie and Freddie is still being written,” he said. “We could end up saying Fannie and Freddie didn’t cost us all that much either.”
Just $410 billion in TARP money was distributed. And because the program formally ended last year and only its existing initiatives can continue to be funded, it will not spend more than $475 billion.