By Yalman Onaran and Alexis Leondis
(c) 2010 Bloomberg News
Wednesday, October 20, 2010; 11:00 AM
Oct. 20 (Bloomberg) -- The U.S. government's bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than yields paid on 30- year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades.
The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit. Investing in the stock market or gold would have paid off better.
When the government first announced its intention to plow funds into the nation's banks in October 2008 to resuscitate the financial system, many expected it to lose hundreds of billions of dollars. Two years later TARP's bank and insurance investments have made money, and about two-thirds of the funds have been paid back. Yet Democrats are struggling to turn those gains into political capital, and the indirect costs of propping up banks could have longer-term consequences for the economy.
"From the perspective of the taxpayers getting their money back, TARP has been a great success," said Todd Petzel, chief investment officer at New York-based Offit Capital Advisors LLC, which has more than $5 billion of assets under management. "But there are other costs as the government made it possible for the banks to pay back TARP. Those costs can turn out to be larger, and their legacy could last longer."
Banks benefited from dozens of other programs instituted by the Federal Reserve and the U.S. Treasury Department during the worst financial crisis since the Great Depression, from the purchase of mortgage-backed securities to the bailout of home- lending giants Fannie Mae and Freddie Mac. The suppression of interest rates at close to zero for most of the last two years has also boosted banks' income, enabling them to borrow money at almost no cost and lend at higher rates.
Those low rates drove down yields on instruments used by American savers. U.S. Treasury 30-year bonds yielded an average of 4.1 percent from Oct. 20, 2008, through yesterday, according to Bloomberg data. When the price appreciation of the bonds is taken into account, the return for the two years is 13.9 percent.
Two-year Treasury notes fared even worse. They returned 6.2 percent over two years, yielding less than 1 percent on average.
Average rates for high-yield savings accounts, which generally have at least $10,000 in deposits and are insured by the Federal Deposit Insurance Corp., have ranged from 0.36 percent to 0.92 percent over the past two years, based on data from research firm Market Rates Insight in San Anselmo, California. A two-year CD purchased in October 2008 returned 2.8 percent annually, according to Bankrate.com, the North Palm Beach, Florida-based website that tracks bank products.
Taxable money-market funds, sold by brokerage firms and not FDIC-insured, offered cumulative returns of 0.5 percent for the two years beginning September 2008, based on data from iMoneyNet, a research firm in Westborough, Massachusetts.
Better performers include the stock market, with the Standard & Poor's 500 Index gaining 24 percent in the two years since Oct. 20, 2008. SPDR Gold Trust, a gold exchange-traded fund, offered a total return of 66 percent, according to Bloomberg data.
The $25 billion TARP return could fund the SEC for more than 20 years, based on the agency's proposed 2011 fiscal year budget. It could pay for all farm subsidies in the U.S. for more than two years. Bloomberg compiled the TARP data from reports by the Treasury, FDIC and the Office of the Special Inspector General for the Troubled Asset Relief Program.
"I am surprised at the numbers because the consensus seemed to be we threw good money after bad and wouldn't get repaid," said Jane King, president of Fairfield Financial Advisors Ltd., a Wellesley, Massachusetts-based fee-only firm whose clients have $5 million to $10 million in net worth.
The Treasury said in an Oct. 5 report that it expects to lose about $17 billion on the separate $80 billion TARP payout to Detroit automakers General Motors Co. and Chrysler LLC. The bank and insurance portion of the bailout, which includes $47.5 billion to New York-based American International Group Inc., will probably earn $11 billion in the end, taking expected losses into account, according to Treasury estimates.
One of the biggest investments produced one of the best returns. While New York-based Citigroup Inc. still hasn't paid back $12 billion of the $45 billion it received, Treasury has already made $8.2 billion, or an 18 percent return, mostly as a result of selling its stake in the lender at a higher price, according to data analyzed by Bloomberg.
After collecting repayments, dividends and proceeds from warrant sales, the government earned a 14 percent return on the $10 billion it gave Goldman Sachs Group Inc. and a 13 percent return on the $10 billion that went to Morgan Stanley. Both firms are based in New York.
Even with the turnaround on bank and insurance investments, TARP remains a political career-killer. Some candidates lost primaries this year in part because they voted for the program, which was proposed by President George W. Bush. The Republican president urged lawmakers to approve it or risk a global financial calamity. Candidates from both parties who are running for election in November have been attacked for backing TARP.
That's because of voters' dissatisfaction with banks. A July poll by Angus-Reid Public Opinion found that 90 percent of Americans blame financial institutions for the crisis. The public also feels the pain of indirect subsidies to the banks, Offit's Petzel said.
One of those subsidies is the $350 billion that savers forgo each year because the Fed keeps interest rates near zero, according to Petzel's calculations. While banks can borrow at close to zero from the Fed, they lend to consumers and corporations at almost 5 percent, or to the Treasury at 2.5 percent, and they get to keep the difference.
"The huge wealth transfer from fixed-income pensioners to the banks has helped the banks repay TARP," Petzel said.
The government and the Fed took on more risk than just TARP during the crisis, which isn't reflected in the program's cost, said Nomi Prins, a former Goldman Sachs managing director and author of the 2009 book, "It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street."
According to Prins's tally, the money plowed into the financial system to prop it up peaked at $19.4 trillion. Banks have benefited from that cash, which helped keep prices of mortgage securities, house prices and other assets overvalued, Prins said in an interview. Even though some of the support has been withdrawn, part of it will likely be lost, such as the hundreds of billions of dollars put into Fannie Mae and Freddie Mac, she said.
"These are all indirect subsidies the banks got," Prins said. "So the TARP gains touted by the Treasury are only true if you ignore all the other costs."