How Much Could the Government Lose on TARP?

A research firm says the U.S. lost $104 billion on the ownership stakes it took in financial companies in return for TARP funds. Losses could mount

While the U.S. government keeps doling out taxpayer money in a frenzied effort to save the financial system, more scrutiny is being paid to what the government is getting in return for its bailouts—and how big a loss taxpayers are likely to suffer in the end.

Elizabeth Warren, who heads the Congressional Oversight Panel responsible for keeping tabs on the Troubled Asset Relief Program (TARP), estimates that $590.4 billion of the total $700 billion approved by Congress has been spent or committed over the past six months. But economic stabilization efforts that have relied on the Federal Reserve's balance sheet have "permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress," the panel said in its Apr. 7 oversight report.

Although the Treasury has been taking stock and warrants in companies in exchange for TARP funds, from the start the value of assets it has received has been much less than the TARP money it has doled out. For every $100 of TARP money disbursed, the government has gotten stock and warrants worth just $66 at the time of issuance, Warren said in an Apr. 15 interview with Jon Stewart on The Daily Show. The value of those assets has deteriorated further since being issued, she said.

I read it that way too so?

The calculated losses don’t include the potential hit the government could take on assets that it has guaranteed for some of these banks, such as $300 billion of Citigroup’s assets. “By all indications, it sounds like the government doesn’t know what they have in the TARP program,” says Linssen. “It doesn’t know how much [it has] made. My opinion is they don’t know how much they’re guaranteeing.”

If Citigroup’s mortgage-backed assets turn out to be worth close to the value of the assets that other TARP recipients are now trying to sell for 30¢ to 50¢ on the dollar, the government would have to take a writedown of at least $150 billion on them once they’re sold, says Brigham at Ethisphere. “They are scary numbers,” he says.

AND THIS IS IT EVEN LEGAL?

Then there’s the up to $100 billion in TARP funds the government plans to use to subsidize private investors buying toxic assets off banks’ balance sheets under the soon-to-be-launched Public-Private Investment Program (PPIP). The goal is that by matching private investors’ contributions one-to-one and providing loans at up to six times leverage, the program can generate $500 billion in purchasing power to buy legacy assets—which could expand to $1 trillion over time. And the hope is that these purchases, by providing more price transparency for the assets, will reignite other investors’ confidence in these assets.

STRINGING OUT INVESTOR CASH FLOWS
But if the debt markets continue to deteriorate and no one can make a profit on these assets, taxpayers would lose their entire investment in the program. There’s an additional risk that at the end of the five-year term of the Federal Deposit Insurance Corp.-backed loans made under PPIP, investors might send back the assets they’ve bought to the government if they haven’t appreciated in value by that time, according to Tom Atteberry, a fixed-income portfolio manager at First Pacific Advisors in Los Angeles,

Moreover, the mortgage-modification program proposed by the Obama Administration increases the likelihood of that scenario, Atteberry believes. By reducing the debt-to-income ratio to 31% and raising the loan-to-value refinance standard to 105%, the program will either continue to generate redefault rates between 25% and 50% or it will string out investors’ cash flows over a longer period of time, he says.

Even for loans that don’t redefault, lowering monthly payments means it will take twice as long for investors to earn the return they’ve been promised on an asset. And even though borrowers may be able to keep up monthly payments, they probably won’t be able to afford maintenance and improvements needed to preserve or increase the property’s value and won’t be able to refinance at lower mortgage rates, Atteberry says.

FAILING BANKS COULD BE LIQUIDATED
The less cash these assets return to investors, the more likely they will b

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