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Sid in his law office where he sits when meeting with clients. Observant eyes will notice the statuette of one of Sid's favorite Democrats.

Saturday, December 20, 2014

TARP, $426 billion rescue package that saved a swath of U.S. companies but never won public support.

From The Wall Street Journal:

WASHINGTON—The U.S. government closed a chapter in financial-crisis history Friday when it sold its remaining shares of Ally Financial Inc. and shuttered its auto-bailout program, ending the last major pieces of a $426 billion rescue package that saved a swath of U.S. companies but never won public support.

The Treasury Department said the 2008 Troubled Asset Relief Program has netted a small profit, returning $441.7 billion on the $426.4 billion invested in firms including Citigroup Inc., Bank of America Corp. , General Motors Co. , Chrysler and American International Group , Inc.

That profit, unexpected at the time of the bailout’s inception, has been nonetheless overshadowed by criticism that the rescue program put Wall Street’s interests ahead of Main Street’s, a view that prompted Congress to outlaw future taxpayer bailouts as part of the 2010 Dodd-Frank law. About 35 smaller banks remain in the program, down from about 700 financial firms at the height of the program. Critics have also pointed to the possible costs of having such a large amount of government funds tied up for so long and to the risks assumed by the government with its bailouts.

While the U.S. is largely exiting from its ownership of TARP companies, it still controls mortgage giants Fannie Mae and Freddie Mac . Those firms, which were rescued by the Treasury Department before Congress created TARP, have returned to profitability, but lawmakers and the White House have yet to agree on what role the companies should continue to play and how to unwind the government’s control.

For Corporate America, the program has been seen as a success. The biggest companies rescued by TARP have emerged from the program stronger and more nimble, with some receiving multiple infusions to overcome crippling losses, then later taking themselves public.

In 2010, GM’s $18 billion initial public offering was the largest U.S. IPO that year, and Citigroup’s $10.5 billion stock sale was the largest non-IPO stock offering by a U.S. company, according to Dealogic. In 2012, AIG made the biggest stock sale in the U.S. that year, at $20.7 billion, topping Facebook ’s $16 billion IPO. Overall, the Treasury sold more than $80 billion worth of stock and convertible warrants from 2010 to 2012, or more than 10% of total U.S. equity offerings over that period, according to Dealogic.

Since its third bailout in late 2009, Ally—the former financing arm of GM—has had just three losing quarters, has shed the troubled subprime-mortgage business that was the main source of its financial problems and has reported earnings totaling more than $3.6 billion.

The Treasury said Friday it sold taxpayers’ remaining shares as the broader stock market rose during the past few days, bringing its total income on the investment to $19.6 billion—a $2.4 billion profit. Ally stock rose 51 cents, or 2.2%, to $23.26 during the day’s session.

On Friday, President Barack Obama declared the U.S. rescue of the auto industry “officially over,” adding, “we’ve now repaid taxpayers every dime and more of what my administration committed, and the American auto industry is on track for its strongest year since 2005.”

Mr. Obama and his predecessor, President George W. Bush , have credited TARP with helping avert an even-more-severe recession following the financial crisis. When it was proposed in 2008, the government was desperate to stem an economic panic that was cutting off credit for businesses across the country.

Six years later, the banking industry is “healthier than it was precrisis,” said Barclays PLC analyst Jason Goldberg. “We’re beyond where we were. You have more capital, more liquidity, more scrutiny and more ‘stress-testing.’ ” Mr. Goldberg said profitability measures, such as return on equity and return on assets, are approaching precrisis levels.

Banks across the country in the third quarter notched their largest quarterly revenue increase since 2009, according to data from the Federal Deposit Insurance Corp. Revenue at the 6,589 banks the regulator insures rose 4.8% in the third quarter from a year earlier, to $171.3 billion. Net income increased 7.3% from a year ago to $38.7 billion, the fourth-highest figure on record.

“For other governments who are contemplating how to dispose of the stakes they acquired during the financial crisis, it’s a model case of how to do it. They’ve done an exceptional job,” said Mark Hantho, global head of equity capital markets for Deutsche Bank AG . “The key move by the government was to let the private sector and people close to the companies run the process, as opposed to assigning the work politically.”

But criticism has persisted that TARP put Wall Street ahead of troubled borrowers whose housing woes were at the root of the crisis. Less than $15 billion of $75 billion promised for homeowner assistance has been spent. Earlier this month, the Treasury announced a plan to double payments to some borrowers in an effort to keep homeowners enrolled in the program and spend some of the unused money.

The Treasury’s financial prowess has also been questioned, along with whether it demanded enough from the companies taking billions of taxpayer dollars. In February 2009, a congressional oversight panel reviewed the top 10 TARP transactions by value, not including the Ally bailout, and found, “every time Treasury spent $100, it took back assets that were worth, on average, $66,” meaning taxpayers weren’t adequately compensated for the risk they were taking.

“As a way to stop a panic, [TARP] was absolutely needed and basically successful,” said Damon Silvers, director of policy for the AFL-CIO federation of labor unions and a former member of the oversight panel. “As a financial transaction, the public did not get its money’s worth.”

The Treasury has posted a 3.6% return on its TARP investments thus far. The S&P 500 on Friday was up 206% from its low on March 9, 2009.

Christy Romero, the TARP special inspector general, has faulted the Treasury for not getting concessions from banks taking funds. “There were no strings on the money,” she said.

The decision to save big Wall Street firms, rather than force them to shrink and take heavy losses or file for bankruptcy protection, sowed distrust of both Wall Street and the government’s ability to police it that continues today, as embodied in the populist critiques of Sen. Elizabeth Warren ’s (D., Mass.), another former TARP watchdog.

The program’s defenders say imposing onerous terms on struggling companies would have undermined the purpose of the rescue. TARP’s “benefits in stabilizing the financial system and the economy as a whole were worth hundreds of billions of dollars, and yet it turned out to be essentially free,” said Doug Elliott, a fellow for economic studies at the Brookings Institution. “I call it the best large federal program ever to be despised by the public.”

Ally, formerly known as GMAC, had been by far the largest remaining company on the government dole. It tapped the bailout program three times, receiving taxpayer help worth $17.2 billion as the Bush and Obama administrations moved to backstop a crucial source of financing for GM vehicles. The government owned a 74% stake in the company as recently as November 2013.

Ally’s initial public offering in April raised $2.38 billion for the Treasury, which sold 95 million shares. That offering pared the Treasury’s stake in Ally to 17% from 37%.


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