Now that the elections are over we can watch TV without the thunderous roar of ad after ad of candidates accusing each other of supporting or not supporting the so-called “$800 billion Wall Street bail-out”. So I ask, what did happen to all that money and did it all go for bonuses to investment bankers? I’m an accountant by training so I like to review data to solve problems. So here’s my analysis.
The Government bailout was signed into law on October 3, 2008 by President George W. Bush with wide bi-partisan support. Supporters included Senators Obama and McCain and 91 Republican members of the House of Representatives, including John Boehner, the presumptive Speaker of the House. The legislation was named the Troubled Asset Relief Program or “TARP” for short. It was passed into law as many financial institutions and others were on the brink of collapsing due to problems in the housing and other markets. It called for up to $700 billion of funding, not $800 billion.
Roll forward 2 years: of the $700 billion available just $365 billion was allotted. The bulk went to banks and brokerage firms, in fact several hundred banks, with the largest getting up to $25 billion. General Motors and Chrysler each received funding with GM getting about $52 billion. AIG, the large insurer who underwrote the banks’ bad mortgage bets got over $69 billion. Most of the funding was in equity (both common and preferred stock) and a smaller amount in loans. The portion that was preferred stock carried a 5% dividend rate.
Of the approximate $200 billion paid to the banks and brokerage firms, the vast majority has been repaid, in full, with interest and dividends. Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America have all repaid the funds. None of it went to executive bonuses at the big banks. In fact subsequent amendments to TARP contained restrictions on bonuses and that help trigger the rapid repayment. Of the major banks, just Citicorp still has a balance. Most of the unpaid bank TARP money resides with regional banks such as SunTrust Bank in Atlanta who has suffered tremendous losses in the housing market. The remaining amounts outstanding generally are under $3.5 billion per bank.
The largest unpaid TARP money is with AIG and General Motors. General Motors has paid back over $8 billion to date and has filed an IPO to sell shares in the open market. I just reviewed the mind-numbing 242 page prospectus and found that 100% of the proceeds from the IPO will go to pay TARP funds or union pension obligations and other creditors. The U.S. Government stands to get about $2 billion from preferred stock sales and approximately $7 – $8 billion from common stock sales. After the IPO the government will own about 43% of the common stock of GM worth about $17 billion. So if the price of GM does not go up, the Government will lose about half of its investment in GM.
As for AIG, that is a more complex and problematic, with estimates for recovery from 50% to 80% but a lot has to happen. Let’s call that a $20 billion loss.
All told the banks will likely repay 90% or so of the $200 billion given to them. GM will repay about half of its $52 billion and AIG perhaps 70% of its $69 billion. That gives us a total TARP loss of around $65 billion. While that is not chump change, it is not the $800 billion that was so commonly used as fodder in campaign ads. Will history deem TARP a good idea? Perhaps given the alternative but we are subject to revisionist history given that our politicians can’t even remotely get the facts straight in real time.