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U.S. likely to make a profit on bailouts, Treasury says

The taxpayer-funded bailouts could produce as much as $163 billion in profits over the next 10 years, a Treasury report says.

April 14, 2012|By Jim Puzzanghera, Los Angeles Times
  • The U.S. Treasury building in Washington.
The U.S. Treasury building in Washington. (Paul J. Richards/AFP/Getty…)

WASHINGTON — The Obama administration probably will make a profit on all the bailout money spent to prop up banks and other companies, as well as struggling homeowners, devastated by the Great Recession, according to the latest federal projections.

Over the next 10 years, the taxpayer-funded bailouts could produce as much as $163 billion in profits, in a best-case scenario, from repayments, stock sales, dividends and interest paid by banking and insurance firms, auto companies and mortgage finance companies.

That's a stark turnaround from predictions of hundreds of billions in losses in the immediate aftermath of the unprecedented aid, starting at the end of the George W. Bush administration.

The projections were sketched out in a Treasury report released Friday that highlighted the positive effect of the response to the financial crisis by the Bush and the Obama administrations.

Senior Treasury officials said they wanted to dispel misperceptions that the controversial bailouts, including the $700-billion Troubled Asset Relief Program, have been ineffective and costly.

"Collectively, these programs — carried out by both a Republican and a Democratic administration — were effective in preventing the collapse of the financial system, in restarting economic growth and in restoring access to credit and capital," Timothy Massad, Treasury's assistant secretary for financial stability, wrote in a blog post Friday.

However, any profits from the overall bailout efforts will likely turn on the ability of Fannie Mae and Freddie Mac, the housing finance giants seized by the government in 2008 as they neared collapse, to recover.

Taxpayers have pumped a total of about $188 billion into the companies to cover losses from bad mortgages owned or backed by the firms. Fannie and Freddie have paid about $41 billion back to the government in dividends.

Even though the Obama administration projects the companies' losses will drop to $28 billion by 2022, the federal regulator overseeing Fannie and Freddie has said that the companies could soak up as much as $311 billion in taxpayer money by the end of 2014, in a worst-case housing market scenario.

Many Republicans opposed the bailouts, which are likely to be an issue in the November elections, and want the two mortgage finance to be shut down quickly.

Mitt Romney, the presumptive GOP presidential nominee, supported the bank bailouts by the Bush administration in the fall of 2008. But Romney has criticized President Obama for the government-backed bankruptcy reorganizations of General Motors and Chrysler in 2009.

Friday's report said that "overall, the government is now expected to at least break even on its financial stability programs and may realize a positive return." One chart showed $207 billion in total profits from some programs offsetting losses of as little as $44 billion in others.

Senior Treasury officials cautioned, though, that the projections were based on the recovery of the economy and the housing market. They hesitated to highlight the specific dollar figures and said they only felt comfortable saying a profit was likely.

Besides TARP's possible profits, the Treasury's new bailout estimate includes the broader rescue of insurance leviathan American International Group Inc. and Fannie and Freddie, as well as the Federal Reserve's dramatic expansion of its balance sheet through purchases of mortgage-backed securities and other investments.

It's largely the return on those Federal Reserve investments that will lead to the overall profit of the bailout programs, Treasury officials said.

The Fed has been turning over record profits to the Treasury for the last few years, and administration officials project that the central bank will post $179 billion in profits from its bailout and economic stimulus efforts — that is, beyond the earnings expected in normal times — from 2008 through 2015.

On Friday, Fed Chairman Ben S. Bernanke defended the central bank's response to the crisis, which included using tens of billions of dollars to help engineer the sale of investment bank Bear Stearns & Co. and the rescue of AIG.

"The Federal Reserve's responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options," Bernanke said.

He noted that the government at the time did not have the ability to seize and shut down large financial institutions in an orderly way. The sweeping overhaul of financial rules enacted in 2010 gave federal officials that power in the case of another crisis.

The Treasury has trumpeted for months that it already has made a small profit on about $205 billion in TARP money invested in banks, most of which have repaid the money, along with dividends, and have bought back stock warrants given to the government.

TARP still is projected to lose money because of the GM and Chrysler bailouts, as well as the administration's mortgage assistance programs. The Congressional Budget Office last month estimated that TARP would lose $32 billion, an improvement from the $34-billion loss projected in December.

jim.puzzanghera@latimes.com

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