April 27, 2009

How much could we lose on TARP?

BW has a nice little gut-check piece to freak you out a little about potential losses in TARP.

Ethisphere, a research think tank that examines whether companies can benefit from using ethical practices, created a TARP Index in December to track losses taxpayers are taking under the TARP program. Since TARP's inception on Oct. 7, 2008, the government has lost $104.2 billion (as of Apr. 10). The Treasury Dept. did not respond to questions about the losses so far.

The index was created out of skepticism about a remark by Senator Judd Gregg (R-N.H.) that TARP would turn out to be profitable for the government. "It rang hollow for us. [Gregg] was taking into account the imputed interest averaging across these investments," says Alex Brigham, Ethisphere's executive director. "You can get paid interest, but if you don't get your principal back, who cares?"

The biggest losses under TARP as of Apr. 10, Ethisphere estimates, are $30 billion for AIG (AIG), $25 billion for Citigroup (C), and $2.4 billion for Wells Fargo (WFC). These loss calculations are based on stock price declines and each company's financial condition, says Stefan Linssen, managing editor of Ethisphere magazine and one of the lead research analysts for the TARP Index. The largest estimated gains under the program are $3.9 billion for Morgan Stanley (MS), $1.0 billion for Goldman Sachs (GS), and $125.2 million for Financial Institutions Inc. (FISI). These gains are based on those companies' higher stock prices, Linssen says.

Now, ultimately, once regulation is restored and a measure of confidence returns, it's likely the government will recover a substantial amount of it's investment in AIG either by spinning it back to investors or selling it off in chunks. But will we get all of it out? Nah. The frictional cost of all this will be $100 bn or more. In the grand scheme of things, it's minor compared to a collapse in the economy. However, it still hurts.

I still have some hope that government will end up making something off all this. However, I'll be satisfied with us just not going through another depression.

Posted by mcblogger at April 27, 2009 08:35 AM

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