The Great Bank Bailout of 2008 appears to be winding down — or at least some of the money is flowing back to the U.S. Treasury where it came from. So when the books are finally closed, how much will all this have cost taxpayers?
The short answer: It looks like we’ll get a lot — but certainly not all — of the $700 billion back.
The latest installment came from Bank of America, which said last week it was paying off the $45 billion borrowed from the Treasury. And it won’t have to pay a late fee.
You’ll recall that the Troubled Asset Relief Program, or TARP, originally was set up by the Treasury to backstop the Federal Reserve, which began bailing frantically when the banking system started melting down in September 2008. After more than doubling its lending commitments to shore up the financial system to more than $2 trillion the Fed cried “Uncle.”
Uncle Sam responded by dipping into the Treasury's cash hoard. Some bankers resisted taking the money for fear it would make them look weak, so Treasury Secretary Hank Paulson summoned the CEOs of the nation’s biggest banks and persuaded them to borrow billions so there would not be a stigma associated with it. Now many of those banks are beginning to pay pack the funds, in part to get out from under the government's oversight on executive compensation and other matters.
Regarding the government bailout of several "too big to fail" banking institutions. Can you please explain where all of the money these companies have "paid back" to the government went? Or how it is being used? Is it paying back the American taxpayers who are footing the bill? Where did this money originally come from? And is the money these banks are paying back to the government being used to pay off this loan?
- Mike T., Carrollton, Texas
The ultimate tally for taxpayers is a moving target even by government accounting standards because there are still so many things that could go right (or wrong) with the TARP program. In August, the Treasury estimated that roughly $341 billion of the $700 billion would never come back. On Sunday, a Treasury official was quoted as saying the Obama administration now figures it will get back at least $200 billion more than previously estimated, largely because the banks that took loans did better than expected and some of the spending on rescue programs won't be needed.
But Congress and the White House still have plenty of ideas about what to do with the money. One of the latest ideas is to spend $70 billion of it on a new program to create jobs. One package under consideration would include funding for new transportation and infrastructure projects, new tax credits to prod small businesses to hire workers and additional aid to state governments to blunt the budget cuts that are forcing layoffs of public workers.
President Barack Obama suggested Monday that whatever's not spent of the $700 billion could be used to help reduce unemployment and cut the record $1.4 trillion budget deficit. But Republicans countered that legislation blocks any use of TARP funds for nonfinancial or infrastructure projects.
One of the most optimistic estimates of how much money we’ll get back form TARP came from Fed Chairman Ben Bernanke last week. During withering questioning at a hearing on his renomination, the chairman told a skeptical Senate panel he thinks taxpayers will do pretty well.
“If you look at the money that was put into financial institutions specifically, I think overall we're going to end up pretty close to break-even, maybe somewhat in the red, but not too much,” he said.
Bernanke noted that his assessment doesn’t include the more than $20 billion spent to bail out automakers Chrysler and General Motors. That money is probably lost for good, according to a report last month from Neil Barofsky, special inspector general for the TARP program.
No one will know for sure until General Motors is out of the repair shop and back on the road to profitability. Until the company goes public again and investors buy shares on the open market, it’s pretty tough to put a value on Uncle Sam’s majority stake in GM.
That leaves the money handed out to the "financial institutions" Bernanke cited. Those include AIG, the company generally referred to as an “insurance giant.” AIG is now quite a bit smaller, despite the government’s commitment of up to $180 billion in return for 80 percent of the New York-based company. It's hard to see how the government will ever break even on the AIG bailout.
In his report, Barofsky wasn’t all that happy with how the AIG bailout money was spent. Much of it went to banks, including Goldman Sachs and Merrill Lynch, to cancel AIG's debt insurance contracts with them. Barofsky said the government wound up paying billions more than it needed to in that deal because at least one of the banks had agreed to take less than full payment. (Bernanke told the Senate panel the banks that agreed to take less would only do so if everyone went along; government officials couldn't get them all to agree, he said.)
Then there’s the $50 billion that was set aside to pay a bounty to mortgage companies for each bad loan they agree to rewrite to help stop an estimated three million to seven million more foreclosures in the next three years. There’s no provision to get that money back. But since mortgage companies have been dragging their feet working with borrowers, only a few hundred thousand have been helped, it’s a safe bet that only a fraction of that money will be spent.
Though they didn’t have to pay late fees, the banks that borrowed your tax dollars did have to pay interest and dividends, and they had to give the government stock that can be sold. So far, those proceeds come to about $13 billion. (The interest payments amounted to about 8 percent. Imagine how much better off taxpayers would be if the Treasury had charged banks their own credit card rate of 29.99 percent.)
When you add it all up, said Barofsky, the TARP program will "almost certainly" bring a loss for taxpayers. But no one can say how much yet.
When the money comes back, it goes back into the U.S. Treasury. Unless paid out again to other ailing banks, it can then be used for its original purpose — paying the bills to keep the government going. Congress wasn’t all that clear about how many times the money can be recycled.
And it’s not clear when the program ends. It’s supposed to expire at the end of this month, unless Treasury Secretary Tim Geithner decides to extend it.