Wonders will never cease.Recently while announcing that some institutions will be allowed to repay TARP funds, Treasury Secretary Tim Geithner announced that the Fed ,and therefore the taxpayer,had made a profit of about $6 billion on the bailout funds given to banks via The Troubled Assets Relief Program. True TARP funds were not being given out free of cost in the first place,there being a 5%annual dividend on preferred stock and the requirement that the beneficiary issue warrants to the government which it could repurchase later hopefully at a premium.But critics of the scheme did not even expect a full repayment of the principal let alone anything by way of dividend or premium on repurchase of warrants.They were quite vocal in their criticism of the scheme and charged the government with overpaying for the preferred stock which it got from the institutions which got TARP funds.It is claimed that the government may have paid as much as $159 billion more in aid than it received in securities.
Now as things stand, not only has the Fed made a tidy profit by way of interest and dividends, but it also stands to net a substantial profit due to an increase in the value of the shares and warrants it holds in these institutions. The stock market has risen almost 50% from the lows it touched earlier this year and is poised to rise further given the steady stream of encouraging news about the economy. Goldman Sachs which repaid its TARP funds in time not only paid a dividend of $318 million to the government but it also repurchased its warrants for about $1.1 billion. In the process the government netted an annualized return of 23% on the money it gave to Goldman Sachs last year. Likewise American Express has also repurchased its warrants for $340 million with the government making an annualized profit of 26% on the money injected into American Express.
But it's not been a one way street for the government.Apart from the above high profile deals there have been several small banks also that have repaid TARP funds and repurchased their warrants, but at a discount. This is to be expected because warrants by their very nature are highly illiquid instruments, and apart from those issued by the best known names in the business, are unlikely to find ready buyers. Nevertheless the government's claim, when it issued TARP funds, that it was likely to make a profit on the scheme doesn't sound all that far fetched any more.
However the government has not been forthcoming about the true cost of TARP funds to it, inasmuch it is silent about the interest it has to pay on them and also the administrative costs involved. These costs may in fact never be accurately worked out. But given the gravity of the crisis facing the economy it will have been worthwhile even if the government breaks even on the scheme.
Now as things stand, not only has the Fed made a tidy profit by way of interest and dividends, but it also stands to net a substantial profit due to an increase in the value of the shares and warrants it holds in these institutions. The stock market has risen almost 50% from the lows it touched earlier this year and is poised to rise further given the steady stream of encouraging news about the economy. Goldman Sachs which repaid its TARP funds in time not only paid a dividend of $318 million to the government but it also repurchased its warrants for about $1.1 billion. In the process the government netted an annualized return of 23% on the money it gave to Goldman Sachs last year. Likewise American Express has also repurchased its warrants for $340 million with the government making an annualized profit of 26% on the money injected into American Express.
But it's not been a one way street for the government.Apart from the above high profile deals there have been several small banks also that have repaid TARP funds and repurchased their warrants, but at a discount. This is to be expected because warrants by their very nature are highly illiquid instruments, and apart from those issued by the best known names in the business, are unlikely to find ready buyers. Nevertheless the government's claim, when it issued TARP funds, that it was likely to make a profit on the scheme doesn't sound all that far fetched any more.
However the government has not been forthcoming about the true cost of TARP funds to it, inasmuch it is silent about the interest it has to pay on them and also the administrative costs involved. These costs may in fact never be accurately worked out. But given the gravity of the crisis facing the economy it will have been worthwhile even if the government breaks even on the scheme.
Interesting to learn about this.
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