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TARP Silences Critics, Stands Tall

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According to a calculation released by the Treasury on Wednesday, the $700 billion Troubled Asset Relief Program (TARP) will finally profit by about $23.6 billion. The program was initiated two years ago to rescue the nation’s financial industry.

The Federal Reserve is expected to realize the profits by 2013. Considering the effectiveness in easing credit and capital market pressure, restoring confidence in the financial system, and recovery of the injected money at a lower-than-expected cost, there can be no two minds about the fact that the government’s highly criticized bailout program has finally turned out to be a superhit. TARP has eventually wiped out every inkling of doubt.

TARP: A Cost Efficient Program

The program not only played a major role in stabilizing the economy, it actually did so at a lower-than-expected cost to taxpayers. The estimate of its overall cost is consistently trickling down.

According to the Congressional Budget Office’s (CBO) estimate, the cost related to TARP will drop to $25 billion from $28 billion estimated for the President’s 2012 fiscal year budget. If we look back at the Treasury’s initial estimate of $350 billion, the present estimate by CBO shows a gigantic drop.  

Cost Surface

The assistance to American International Group (AIG - Free Report) , support to automakers and efforts to prevent foreclosures remain on the costs side of the ledger.

The Treasury now owns 92% of AIG and expects to sell some of its holdings, which should pull the total cost of TARP further down.

Will Income Offset Costs?

The Federal Reserve’s expected profits and the Treasury’s $13.5 billion earnings from the sale of Mortgage-Backed Securities (MBS) will more than offset the expected losses from the bailout of the two government sponsored enterprise — Fannie Mae and Freddie Mac — as well as costs related to American International Group and automakers.

Bank Bailout Spins to Profit

With a total repayment of $7.4 billion from three banks on Wednesday, the TARP for banks turned into a profit. Out of the total $700 billion bailout money, about $245 billion was handed out to banks in 2008. Now with the latest repayments, taxpayers have recovered total $251 billion from bailed out banks, pocketing profit of about $6 billion. This recovery includes dividends and interest income from banks.

However, more than $20 billion is still due from about 600 institutions. Once these institutions reimburse, profit from the bank bailout will swell and grow even more.

Banks That Repaid     

  • Atlanta, Georgia-based SunTrust Banks, Inc. (STI - Free Report) paid back $4.9 billion.
  • Cleveland, Ohio-based KeyCorp (KEY - Free Report) repaid $2.5 billion.
  • Warsaw, New York-based Financial Institutions Inc. (FISI - Free Report) returned $25 million.

More Success Ahead?

The final success of TARP is probably still in the pipeline. While most of the major financial institutions have cleared their dues, many banks are still to repay their bailout loans.

Though a major chunk of the remaining TARP fund will likely be absorbed by the Home Affordable Modification Program, the Treasury’s recovery mission continues. As a result, there is more to come, both in profits as well as cost reductions.

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