The government may rake in multibillion-dollar profits when it sells shares in Citigroup. But like any investment, the $700 billion financial bailout was a wager, with losing bets as well as winners.
The government has started selling its stake in Citigroup, and taxpayers stand to see a multibillion-dollar profit from that deal and from the bailouts of other big banks.
Those are the winning bets in the game of financial-rescue roulette the government has been playing. But there are plenty of losers, too.
At this point, the Treasury Department has distributed less than $400 billion from the Troubled Asset Relief Program, or TARP. The big banks have rushed to return their money to get out from under the heightened federal scrutiny that came with the cash.
"The bulk of the TARP money went with guns at their heads in often cases to banks that didn't need it anyway," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. "Most of that's come back, and all of it's coming back with interest."
The Upside Is Big
Of the big banks, the only one with warrants still outstanding is Citigroup, and this week Treasury announced a plan to sell all 7.7 billion shares of its Citi stock. Darrell Duffie, a finance professor at Stanford University, says the U.S. stands to make a healthy profit on that deal.
"We bought them for about $1 less than the price at which we're going to sell them, so we're going to make money, maybe a few billion dollars," Duffie said.
That figure could be close to $8 billion. All told, taxpayers will be in the black on the investments in big banks. Combining the money that's already been paid back with interest and dividends and other profits, on net, TARP is down just $200 billion.
The Downside Is Bigger
But that's where the winning streak turns to a slump. A huge chunk of the TARP money was invested in insurance giant AIG and the auto industry.
Brian Bethune, chief U.S. economist at IHS Global Insight, says that of the $80 billion invested in car companies, taxpayers can only hope to get about half of it back.
"You put four quarters into the slot machine, and you only get two quarters back," Bethune says. "It's not a very good rate of return on the taxpayers' dollars."
But these potential losses pale in comparison to the investments in mortgage giants Fannie Mae and Freddie Mac. Although those two are not part of the TARP, the price tag on their bailout is $126 billion and climbing.
Petrou says those firms could have another $200 billion in losses that haven't been accounted for yet. And, Petrou says, don't expect much of a payback from Fannie and Freddie.
"The bulk of it's gone forever," she said. "I don't see any way of getting it back. You may get a little bit of it back by how we restructure Fannie and Freddie, and to the degree we can privatize pieces of it, whomever buys those pieces will pay the U.S. Treasury for them.
"But it can't be on the magnitude of what's gone out the door."
'A Fantastic Investment'
Now all these examples don't account for the investments made by the Federal Reserve. But Stanford's Duffie says the bailout money can't be viewed in the same way as a typical investment portfolio.
"Altogether, if you take a broader point of view, this was a fantastic investment," he said. "We didn't invest that money like an ordinary stock market investor just to get those stock market returns."
Duffie says the government put up hundreds of billions of dollars to save the economy, and he for one thinks it worked.
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