How Much Could the Government Lose on TARP?

A research firm says the U.S. lost $104 billion on the ownership stakes it took in financial companies in return for TARP funds. Losses could mount

By David Bogoslaw

While the U.S. government keeps doling out taxpayer money in a frenzied effort to save the financial system, more scrutiny is being paid to what the government is getting in return for its bailouts—and how big a loss taxpayers are likely to suffer in the end.

Elizabeth Warren, who heads the Congressional Oversight Panel responsible for keeping tabs on the Troubled Asset Relief Program (TARP), estimates that $590.4 billion of the total $700 billion approved by Congress has been spent or committed over the past six months. But economic stabilization efforts that have relied on the Federal Reserve's balance sheet have "permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress," the panel said in its Apr. 7 oversight report.

Although the Treasury has been taking stock and warrants in companies in exchange for TARP funds, from the start the value of assets it has received has been much less than the TARP money it has doled out. For every $100 of TARP money disbursed, the government has gotten stock and warrants worth just $66 at the time of issuance, Warren said in an Apr. 15 interview with Jon Stewart on The Daily Show. The value of those assets has deteriorated further since being issued, she said.

Tracking Taxpayer Losses

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.

Citi Shares Took a Beating

As a result of the plunge in Citigroup's stock since February, Ethisphere has marked down the value of the government's $45 billion investment in the bank, says Linssen. In February, Citi converted $25 billion in preferred shares the government had received into common equity, which translated to a 36% stake in the company. That, plus the conversion of an additional $27.5 billion of other publicly held preferred shares, diluted existing shareholders and sparked a sell-off in Citi's shares. The government's stake is now worth just $13 billion, estimates Linssen.

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