The Treasury Department just raked in a cool $25 billion for the American taxpayer. It sold the agency-backed mortgage-backed securities (MBS) that it bought during the financial crisis. ”The successful sale of these securities marks another important milestone in the wind-down of the government’s emergency financial crisis response efforts,” said Mary Miller, Treasury assistant secretary for financial markets. The Treasury’s mortgage purchases were one part of the government’s support for banks and the financial markets. The associated takeover of Fannie Mae and Freddie Mac cost another $151 billion.
Treasury bought the mortgage debt in an attempt to stabilize the housing industry, with funds approved by the Housing and Recovery Act of 2008. Critics claim that it did more to prop up Wall Street than Main Street. Anti-bailout anger fueled both the conservative Tea Party movement and Occupy Wall Street on the left. Treasury Secretary Timothy Geithner argues that the government’s action helped prevent a deeper economic downturn. TARP funds enabled the government to purchase preferred stock in banks, other financial firms and some automakers in return for the public investment. Some of the preferred stock ultimately was converted to common stock. According to a Treasury official, to date $331 billion has been repaid, including dividends and interest earned on the preferred shares. While TARP currently is $83 billion in debt, Treasury projects losses will eventually number about $68 billion. The nonpartisan Congressional Budget Office forecasts a lower loss of just $34 billion.
The Obama administration has stressed the TARP bank program’s performance, which has returned about $259 billion, more than the $245 billion lenders received. At present. there are 361 banks remaining in TARP.
In all, Treasury bought $225 billion worth of mortgage-backed securities during the depths of the financial crisis between October of 2008 and December of 2009. Some of those securities were backing loans believed to be worthless, according to some financial analysts at the time. Treasury’s portfolio, however, was comprised mostly of 30-year fixed-rate mortgage-backed securities and were guaranteed by Fannie Mae or Freddie Mac, enhancing their value. Congress authorized $700 billion for TARP, but Treasury only paid out $414 billion. Of that, $331 billion has been paid back, including profits, interest and dividends made from investments.
Writing for The Hill, Peter Schroeder notes that “Now, with markets surging and the financial crisis in the rearview mirror — and with the presidential campaign rapidly approaching — the government is backing away from its outsized presence in the markets. The move marks the latest in a series of steps by the government to exit its crisis-driven investments. In July, the Treasury announced it was no longer invested in Chrysler, ending with a roughly $1.3 billion loss. However, the government has fared better with investments in the banking sector. The Treasury announced roughly one year ago that it had officially turned a profit on that portion of the bailout, and ultimately estimates it will turn a $20 billion profit on the $245 billion that was pumped into banks.”
All industry analysts are not as optimistic. Economist Douglas Lee, of the advisory firm Economics from Washington, said it is inevitable that the government will end up with “substantial losses” on the bailout, but that it was appropriate to try to reap gains where possible. “A lot of these assets that were acquired were distressed at the time that they were bought so the chance of coming out ahead in selected areas is quite good,” Lee said. For the long term, however, the effort to rebuild a reliable housing finance system means that costs for subsidizing operations of firms like Fannie Mae and Freddie Mac will continue to be expensive. Investments in insurer AIG and in automakers might prove hard to recoup 100 percent. Recently, Treasury said it was selling 206.9 million shares of AIG, which would reduce the government’s stake in the company to 70 percent from 77 percent. “You have to say that these programs have worked in the sense that it’s restored a sense of stability that we sought,” Lee said, “but now it is right to have the government back out and let the private sector get on with their job.”
Tags: AIG, Chrysler, Congressional Budget Office, Fannie Mae, financial crisis, Freddie Mac, Housing and Recovery Act of 2008, Main Street, mortgage-backed securities, Obama administration, Occupy movement, Tea Party movement, Timothy Geithner, Treasury Department, Troubled Asset Relief Program, Wall Street