Making Bank on Bailouts

How the Treasury is Turning a Profit on TARP

The Treasury is deploying new tactics to make money off TARP's massive bank bailout. Alex Klein reports on how you stand to profit from two lucrative weeks of financial payback.

Mark Lennihan / AP Photo

Do you feel $19.6 billion richer?

Because that’s how much “profit” the government has turned on the central component of the now-infamous Troubled Asset Relief Program.

Of the $467 billion that was ultimately disbursed through the various TARP programs in 2008 and 2009, about $245 billion went toward buying preferred shares in beleaguered American banks, large and small. That was known as the Capital Purchase Program (CPP). In exchange, the Treasury received “warrants,” whose value stood to rise as the banks recovered.

Since June 2009, banks have been steadily repurchasing their shares from the government. That money, plus stock dividends and warrant sales, goes straight to reducing the deficit—so long as the TARPers keep making repayments, the taxpayers will come away with a handy profit. (Here’s the most recent Treasury TARP report, detailing the transactions.)

But what about the less chipper banks: those who still haven’t made good with the government? In recent months, the Treasury has begun simply auctioning off their shares to the public—on July 23, it began a particularly large fire sale to dispose of shares and debt in 12 banks, some of which aren’t even publicly traded.

July 27, the day that auction closed, rendered a windfall. Shares of Pacific City Financial, Premier Financial Bancorp, CBS Bancorp, Diamond Bancorp, Commonwealth Bancshares, First Western Financial, Market Street Bancshares, Park Bancorporation, Marquette National, Trinity Capital, First Community Financial Partners, and Fidelity went for a total of about $205.7 million (including repurchases), while making the Treasury an extra $31.47 million in warrants.

And some smaller firms have been able to pay back the CPP funds the old-fashioned way. On July 25, Fremont Bancorporation bought back $35 million in shares, plus $1.75 million in subordinated debt granted to the government instead of warrants. On August 1, VIST Financial Corp of Wyomissing, PA, paid back $25 million, with the government making an additional $1.2 million on its warrants.

In addition to profits through the CPP, money has been flowing in from TARP’s public-private investment program (PPIP). In the PPIP, the government made loans to—and made investments in—private-sector investment vehicles that went out and bought up shady mortgages and toxic securities. The theory? As the assets purchased recovered their value and threw off interest payments, the government would get its money back. That capital has been trickling back into government coffers as well.

And on July 31, Blackrock PPIF LP—a fund backed by the world’s largest asset manager—paid back $175 million that it had borrowed from the government through the PPIP program. RLJ Western paid back $618.75 million on the same day, and AllianceBernstein kicked in another $450 million on July 27.

The Treasury has even been making billions back from notorious Wall Street bad boy AIG. For example, on Aug. 3 and Aug. 6, the government sold AIG about 164 million of its own shares for a cool $5.75 billion.

All told, this rash of repayments and stock sales has brought in nearly $7.3 billion to federal coffers.

Despite the success of the CPP, AIG’s recovery, and the new round of auctions, TARP as a whole has yet to turn a “profit.” Treasury says that about 16 percent of its funds have yet to be recovered. But most of the shortfall comes from funds invested in GM and funds obligated to help banks modify mortgages. This latter category of spending was never intended to be recovered. In fact, for making bank on bailouts, the government’s best bet has been, well, the banks.

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As the largest financial institutions finish up their repurchases, and the smallest see their shares and warrants auctioned off by the week, TARP’s central financial bailout may finally be winding down for good —and making money.