A Bank Bailout

So where will the biggest losses come from?

Earlier this year the Treasury revised its estimates of TARP losses down from almost $350 billion to just over $100 billion. Where did the extra money come from?

Surprisingly, it came from the banks. Many of the big banks quickly paid back their TARP loans—with interest—and bought back their stock warrants after Ken Feinberg was put in charge of their payroll. The Special Master for Compensation made it very clear that cash compensation would be limited for companies that owed the Treasury money. So Goldman, JP Morgan, Wells, and others quickly got in line to get off the dole.

But who still owes money? AIG, for one. In spite of some recent asset sales, AIG is still in hock for over $40 billion. The auto companies, for another. They cost us almost $30 billion. And don’t forget the new mortgage program. That consumer bailout is likely to cost about $20 billion.

The unlikely stars of the bailout program have been the banks. With a few notable exceptions, like CIT, the banks have paid back their loans, often netting the government a tidy profit. The biggest losses, though, will come outside of TARP—to Freddie Mac and Fannie Mae. The two mortgage giants together owe over $100 billion to the Treasury. But they’re not in TARP. Congress thinks they’re special. So we just won’t hear about them.

Douglas R. Tengdin, CFA
Chief Investment Officer
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