Too Early to Know if Taxpayers Will Benefit From Bank Bailout

Update, 4:59 p.m.: Linus Wilson, the University of Louisiana at Lafayette finance professor who crunched the numbers for the NYT in its piece today about taxpayers benefiting from the bank bailout, helpfully sent me some additional data that rounds out the picture on how taxpayers are doing on their investment.

The following table shows that four big banks that have yet to re-pay funds they borrowed from TARP are showing an $18 billion paper profit on taxpayers’ investments in these companies (although unadjusted for risk the profits disappear). “TARP Profit” indicates the estimated paper profits on the TARP investments. “Benchmark Profit” indicates the profits if a private investor bought similarly risky securities at the same time as the U.S. Treasury and sold them on the valuation date (click on chart to expand):

A piece in today’s New York Times says that U.S. taxpayers are profiting from the billions of dollars in federal loans made to big banks during the height of the financial crisis. It’s worth noting, however, that this calculation focuses on those banks that have repaid their TARP obligations and omits institutions that still owe money. As economist Dean Baker says:

The government has not yet recorded any losses from the zombies, most notably Citigroup and Bank of America. It is important to note that in the case of these two banks, the government has kept them afloat, after issuing its initial loans through the TARP program, by guaranteeing hundreds of billions of dollars of bad assets. If these banks end up using a substantial portion of these guarantees, then the government will end up a big loser, if they and all other banks repay their TARP loans.

Baker also points out that banks are generating profits by borrowing money from the government at an interest rate of practically zero and then lending money, including back to the feds, at interest rates of 3.5 percent or more. That may be one way to ensure that banks can repay their debts, but it’s a “dubious way to make profits on investments,” he says.

Banks are also getting a sweet deal from the FDIC. The agency is “on the hook” for $80 billion in potential losses stemming from its loss-sharing arrangements with banks that acquire other troubled institutions, according to the WSJ (subscription required). Under these deals, the FDIC typically agrees to absorb 80 percent of the loss if loans and other assets a bank purchase eventually sour.

“Any time a bank bears only 20 percent of the loss, they may not have a strong incentive to work out problem loans,” said Linus Wilson, a finance professor at the University of Louisiana at Lafayette who helped the NYT with its analysis.

It’s encouraging, surely, that taxpayers are seeing a return on their investment in troubled banks (although as Wilson notes that return is lower than what private investors would’ve gotten). But let’s wait until the final tally is in before we start rejoicing.