The Economy Today: Profits and Losses

Keeping the ledger as the feds play banker

In a twist on the reductive Main Street vs. Wall Street narrative in the government bailout story, the New York Times brings news that taxpayers are actually making a profit so far on all those TARP loans the government made to struggling banks.

It’s too early to say what the net result of the TARP loans will be — the government could still take a hit on its loans to insurance giant AIG, mortgage companies Fannie Mae and Freddie Mac and automakers General Motors and Chrysler, as a well as a potential loss on its guarantees on billions of dollars in toxic mortgages, the Times warns. But the government’s foray into running banks has accrued about $4 billion in profits, or a 15 percent annual return on investment, on loans that have been paid back so far.

That’s far more than the modest returns taxpayers were told to expect and a stark contrast to critics’ warnings that it could take years for banks to repay the loans, which might not bear any profits at all, the Times reports.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

The Times coverage comes with a handy chart, a sort of report card tracking banks’ payback status from fully paid up to those still holding IOUs.

Meanwhile, in an article that mentions the same news of TARP profits rolling in, the Wall Street Journal takes a different angle — highlighting the money still leaving government coffers. The Journal reports that through more than 50 deals known as “loss shares,” the FDIC has assumed most of the risk on $80 billion in loans and other assets in order to spur to deal-making among banks, exposing taxpayers to a “big, new risk.”

As financial markets heal and the economy appears to be pulling out of recession, the federal government is shifting from crisis to cleanup mode. But as the loss-share deals show, its potential financial burden isn’t receding. So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements.

The WSJ does an excellent job illustrating the nebulous “loss share” concept with specific examples, highlighting FDIC deals to absorb losses on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida, and accompanies its coverage with an update of an interactive map that tracks bank failures back to the beginning of 2008.

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Alexandra Fenwick is an assistant editor at CJR.