May 27, 2024

Treasury Now Sees Profit From Bailouts

When it comes to calculating the bill for the government’s bailout of banks, insurers, automakers and the ailing housing market, the numbers have been all over the map.

But on Wednesday, Treasury officials laid claim to an eventual $23.6 billion gain for taxpayers on the entire rescue program, despite doubts from skeptics about just how Washington crunched the numbers.

Indeed, as late as Tuesday afternoon, accountants from Treasury and the Office of Management and Budget were at odds over how to calculate the gains the government made on once-troubled mortgage securities it acquired at the height of the financial crisis in 2008.

As a result, on Tuesday morning the Treasury estimated it would show a $100 billion profit but by late Tuesday that had been reduced to nearly $24 billion.

Even that is debatable, however, according to lawmakers like Representative Patrick T. McHenry, Republican of North Carolina, who is chairman of the House oversight committee’s bailout panel.

“The estimates have been consistently off and Treasury has consistently changed the metric for success,” Mr. McHenry said in an interview on Wednesday. “In the beginning, they weren’t touting payback — they touted effectiveness. Now, they are touting payback but ignoring the moral hazard this program has created.”

Treasury officials say they are actually being conservative in their profit projections. But even if that roughly $24 billion estimate proves too optimistic, the trend still represents a major turnabout from the river of red ink critics predicted. The administration itself projected a $100 billion loss only a year ago.

Why did the numbers move so wildly? For starters, asset prices improved as the economy rebounded. But some of the gains remain on paper, and profits that haven’t been booked have to be continually adjusted to reflect price swings in the market. Then there are the vagaries of government accounting, like how to properly value complex mortgage securities.

What is more, the government’s financial rescue remains a political hot potato, drawing criticism from the left and the right, but Obama administration officials are naturally eager to portray it as a success, especially with a budget deficit of $1.5 trillion expected in 2011.

“There is no historical precedent for a financial rescue this effective,” the Treasury secretary, Timothy F. Geithner, said in an interview Tuesday. “We are performing better than all expectations and ahead of the other countries caught up in the crisis.”

At a House Oversight subcommittee hearing on Wednesday, Treasury officials once again sparred with a government watchdog over the success of the financial rescue. In his testimony, Neil M. Barofsky, the special inspector general overseeing the bailout program, greeted the lower cost estimates as “good news,” but warned that the“most significant legacy may be the exacerbation of the problems posed by ‘too big to fail,’ particularly given the manner in which Treasury executed the bailout.”

On Wednesday, the Treasury said that KeyCorp and SunTrust Banks repaid their bailout funds, helping the government claim a $6 billion profit on the bailout program for banks. The Treasury projects it will receive another $14 billion as hundreds of smaller banks repay their bailout funds.

The Treasury is also claiming it will make a $12 billion profit when it winds down its 92 percent ownership stake in the American International Group later this year, although for now that is only on paper. It also assumes that large stake can be sold at current prices, even though unloading such a big position could depress its value.

Those gains could also disappear if several big losses materialize. The Treasury projects the bailouts of General Motors, Chrysler and Ally Financial could cost it about $15 billion, while losses from the government’s beleaguered mortgage modification programs, like HAMP, could wind up reaching $46 billion. (With only about $1 billion of HAMP funds disbursed so far, bailout watchers say the actual loses could be sharply lower.)

Still, the TARP bailout was only one part of the government’s rescue. Counting other federal aid programs allows the administration to radically reduce its overall cost of the effort.

As part of its analysis, the Treasury included in its profit estimates about $1.2 billion from fees it collected from federal guarantees on money market mutual funds during the crisis. It also included realized gains of $22.5 billion from a series of Federal Reserve emergency aid programs designed to get credit flowing again.

But the bulk of its gains come from a bounce-back in the value of more than $1.6 trillion in mortgage bonds and other debt that the government bought as the financial crisis worsened between 2008 and early 2010, in an effort to prop up the housing market. The Treasury has realized about $13.5 billion in income from interest payments of these bonds through the end of 2010, while the Federal Reserve has earned about $72.5 billion on a similar portfolio of securities backed by Fannie Mae and Freddie Mac. Treasury officials project they will collect at least another $16 billion over the next few years.

On Wednesday, the Federal Reserve Bank of New York rejected a $15.7 billion offer from A.I.G. to buy back mortgage securities owned by the government, underscoring Washington’s hard line in trying to maximize the value of its holdings.

Even as the Treasury collects income from the mortgage securities it owns, it is still pumping tens of billions into Fannie and Freddie, the government-controlled mortgage giants, to keep them afloat. Although the Treasury recently lowered its loss estimates, its analysis project that losses stemming from government’s support of the two companies could reach $73 billion over the next decade.

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