Fisher Investments Editorial Staff
US Economy

Short-Changed

By, 03/30/2010

Story Highlights:

  • Since the government bailed out banks via TARP loans during the financial crisis, politicians have been calling for bankers' blood.
  • Banks have repaid over $170 billion of bailout funds plus $13.2 billion in interest payments and $5.7 billion in warrant proceeds, totaling about $189 billion—out of $245 billion loaned.
  • On the other hand, AIG, along with GM, Chrysler, their various suppliers and financial arms (GMAC and Chrysler FinCo) have dragged their feet on repaying bailout loans.
  • Despite banks' efforts, politicians are giving them little credit, likely a reflection of residual negative public sentiment over the financial crisis.
  • Negative sentiments could drive a regulatory backlash or inject uncertainty into Financials—but don't take away from the financial system's increasingly improving fundamentals.

Since the government bailed out banks via TARP loans during the financial crisis, politicians have been calling for bankers' blood with a fervor reminiscent of Boris Karloff—all in the interest of "protecting taxpayer money." Fair enough! But if the issue were truly taxpayer money, public anger would be better directed at non-bank bailout recipients like GM and AIG. Contrary to the common storyline, banks have not been rotten stewards of bailout funds—they've used those funds (forced on them in many cases—by politicians) to strengthen their financial standings, just as they were supposed to do. And many of them have largely repaid the loans—with interest 

The government's TARP investments in bank holding companies (including both the original capital purchase program and additional investments in Citigroup and Bank of America) amounted to $245 billion. Of that, the much-maligned banks have repaid over $170 billion plus $13.2 billion in interest payments and $5.7 billion in warrant proceeds, totaling about $189 billion. The approximately $73 billion still outstanding will likely be repaid in full by the banks eventually—the light at the end of the TARP tunnel doesn't look that far off. 

Even if banks fall short, repaying just another $56 billion, the government still comes out whole from the additional money generated from interest and warrant proceeds. More likely, the full amount is repaid and the government comes out nicely ahead. To wit, the Treasury announced Monday plans to sell the 7.7 billion Citigroup common shares it purchased through TARP, which would reap over $30 billion at $4/share, currently several percent below the going price. 

On the other hand, AIG, along with GM, Chrysler, their various suppliers and financial arms (GMAC and Chrysler FinCo) have dragged their feet on repayment. Of the approximately $88 billion received, the auto industry recipients have repaid around $3.7 billion. AIG has yet to make any repayments on the $70 billion received. The government might have to also write off its other non-bank loans, including a $39 billion investment in mortgage modifications, though newer programs like TALF and PPIP will likely see funds returned. 

Despite banks' efforts, politicians are giving them little credit, preferring to take the hard line against banker bonuses and opting for more industry regulation and taxes—while remaining noticeably silent about the autos and AIG. Likely, politicians are capitalizing on residual negative public sentiment over the financial crisis. Though these sentiments could drive a regulatory backlash that could provide additional headwinds for Financials—thereby possibly depressing share prices—they don't take away from the financial system's increasingly improving fundamentals, which is good for the overall economic recovery.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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