Q&A of the Day – Were Corporate Bailouts Ever Paid Back?
Each day I feature a listener question sent by one of these methods.
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Today’s entry: Submitted via Talkback: Good morning, guys. Did the banks and the airlines ever pay back the bailout money? Thank you, have a good day.
Bottom Line: In the wake of the longest federal government shutdown in American history, and with the debate ongoing about the future of Obamacare and “Affordable Care Act” subsidies...comes today's question about what happened with federal government bailouts of the same era that produced the ACA. What ever happened to the taxpayer money used to prop up banks, auto companies and related companies?
Known as the TARP, or the Troubled Asset Relief Program, the program that was established in October of 2008 under the Emergency Economic Stabilization Act dolled out money to a total of 991 companies. The total amount doled out...$635 billion – with $555 billion going to financial services and $80 billion going to American automotive companies. The stated objectives at the time were these:
- Prevent the collapse of major financial institutions.
- Restore liquidity and confidence in credit markets.
- Mitigate foreclosures and support economic recovery.
The way TARP was carried out worked like this:
- The U.S. Treasury was authorized to purchase up to $700 billion in "troubled assets" (e.g., mortgage-backed securities) from banks.
- Funds were primarily used for direct capital injections into banks via preferred stock purchases (Capital Purchase Program, CPP).
It’s the second piece, the preferred stock purchases, that proved to be key in the long-term outcome of the TARP program and its impact on taxpayers.
Had the program simply been reliant on companies repaying the bailout money they received, the program would have come at a significant expense to taxpayers. Of the $635 billion paid through the program, only $390 billion was ever directly paid back. Not only would that have been a loss of $245 billion – in today’s dollars that would have been the equivalent of a $370 billion loss – or the equivalent of $1,900 per federal taxpayer. However, that wasn’t the end of the story.
Due to the stock ownership interest in many institutions which recovered from the financial crisis, an additional $353 billion was derived through those assets overtime resulting in a net profit of approximately $108 billion. Among the largest recipients of TARP funds, here are names that turned a profit for the federal government:
- Fannie Mae
- Freddie Mac
- AIG
- Citigroup
- Bank of America
- JPMorgan Chase
- Wells Fargo
- Ally Financial
- Morgan Stanley
- Goldman Sachs
- PNC
- Capital One
- SunTrust (now Truist)
- American Express
Here are high profile companies the federal government lost money bailing out:
- General Motors ($11.3 billion in losses)
- Chrysler ($1.2 billion in losses)
- Wells Fargo’s Mortgage Servicing Company ($3.4 billion in losses)
- JPMorgan Chase’s Mortgage Servicing Companies ($3.2 billion in losses)
- Bank of America’s Mortgage Servicing Companies ($2.3 billion in losses)
- CitiMortgage ($781 million)
With 991 companies having been involved there are no shortage of storylines associated with the TARP program, how the bailouts were doled out and the companies that repaid vs. those which entered bankruptcy leading to taxpayers holding the bag for those bailouts. On balance though, the TARP program proved to be a success serving to create some stability in the financial system while leading to a meaningful net profit by the time it was unwound.
Notably, with the federal government’s equity interest in companies proving to have been a good value for taxpayers, President Trump has employed that strategy while seeking to secure the rare earth minerals and technology needs for U.S. defense efforts.
In August President Trump invested $11.1 billion into Intel. The federal government has already realized a $7.66 billion profit on that investment. Similarly, the federal government has realized a 10% net return in a rare earth mineral company from an August investment. Trump signed off on an $1.4 billion investment in a rare earth company just last week.
Its clear President Trump has chosen to use the effective lessons of the past as a strategy to deal with current day challenges as well...and as noted – it's already proven to be a profitable strategy – in addition to a strategic one. Of course, there’s a need for a limit to this lest the idea of nationalization – enter the equation. Nothing about that would serve the interests of anyone involved.