US Treasury’s bail-out profits top $10bn

US Treasury’s bail-out profits top $10bn
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2010
Published: April 5 2010 18:27 | Last updated: April 5 2010 18:27
http://www.ft.com/cms/s/0/7dbc8cac-40d4-11df-94c2-00144feabdc0.html


The US government has made more than $10bn so far on banks’ repayments of bail-out funds, according to a new analysis that suggests taxpayers might turn a profit on the unprecedented help extended to the financial sector during the crisis.

Goldman Sachs and American Express played a large role in boosting the US Treasury’s coffers by agreeing to pay a favourable price for the warrants received in return for the aid, the study by the consultancy SNL Financial shows.

The annualised return of 8.5 per cent reaped by authorities on banks’ preferred stock and warrants is smaller than the profits of other investors in the sector, including Warren Buffett’s investment in Goldman.

But the Treasury’s profits on its $250bn crisis-time investment in banks might quell the political backlash against the use of taxpayers’ funds to help companies like Citigroup, Bank of America, Goldman and Morgan Stanley.

“The government did not do the bail-out to make money but to provide stability to the financial system,” said Russ Yates, one of the authors of the SNL report. “The government’s job is not to make money off the private sector.“

News of the government’s returns on its Troubled Asset Relief Programme comes as a high-powered commission into the causes of the crisis is due to grill Alan Greenspan, former chairman of the Federal Reserve, and Citi executives this week.

Treasury still expects to lose $117bn on the entire Tarp Programme, which includes investments in the car industry and AIG, the insurer. But the SNL report suggests the financial sector’s part of the plan, which was originally expected to cost $76bn, might prove profitable.

The 49 companies that returned Tarp funds, which paid dividends on the government’s preferred stock and either repurchased or let Treasury auction the warrants, yielded a profit of $10.5bn for the authorities, SNL found.

Goldman and American Express were among the biggest sources of profits, generating an annualised return of 20 per cent and 23 per cent, respectively, after repurchasing warrants in July 2009.

At the time, analysts said that Goldman, which was under intense political pressure over its pay practices and its behaviour during AIG’s collapse, had offered Treasury a good price to buy back the securities.

The government stands to make a further profit on its planned sale of its 27 per cent stake in Citi. However, investments in smaller banks might be loss-making, with some 28 lenders holding a total of $1.9bn in Tarp funds being regarded as undercapitalised, SNL said.

Critics like Linus Wilson, a finance professor at the University of Louisiana, said the government’s returns were largely driven by the surge in banks’ shares over the past year. He added: “Treasury continues to get lucky. A year ago, few could have predicted the stock market would have been as high as it is today.”

Additional reporting by Alan Rappeport in Washington