As Wells Fargo becomes the last of the big banks to repay their TARP funds in full, Tim Geithner takes a victory lap and contradicts his own Administration in claiming that the TARP will produce a “healthy profit”:

Plans from Wells Fargo and Citigroup to repay taxpayer funds will put the U.S. government on track to reduce its bailout investments in banks by more than 75 percent, while earning a healthy profit for the U.S., U.S. Treasury Secretary Timothy Geithner said Monday.

“With the recent announcements on repayments, we are now on track to reduce TARP bank investments by more than 75 percent, while earning a healthy profit on that commitment,” Geithner said in a statement after Wells Fargo announced it will repay the $25 billion it received from the government under the Troubled Asset Relief Program after it sells $10.4 billion of common shares.

Actually, this is more a case of bad headline writing; Geithner is talking about a profit in bank investments, neglecting the other investments that have used TARP funds, like the money to AIG and the auto industry. If you add up the entire program in sum, it is still projected to lose money, $42 billion dollars in the 2009 budget year and $141 billion overall, to be exact. To put it in perspective, $42 billion would fund the entire federal food stamp program for 2009 (with about $8 billion left over), and $141 billion would pay for one and a half years of the health care reform legislation.

You may think that level of expenditure was worth preventing a total collapse of the financial system and a second Great Depression. But as I’ve been saying for weeks, looking at federal aid to the banks through the tiny lens of the TARP is like basing whether you like a seven course meal on whether you enjoyed the cherry on top of the ice cream sundae dessert. There are multiple other ways in which the Administration, whether through the Federal Reserve or the FDIC or the Treasury Department, through special purpose vehicles with exotic titles like TALF, TLGP, TIP, PPI, or any of a dozen other programs, either discounted lending to banks and financial firms, bought up their junk securities, or outright handed them money. In fact, the banks rushing to repay TARP now are probably doing so to raise capital while the government is supporting home prices and by extension their toxic waste MBS.

The total numbers on this are simply staggering, and while taxpayers aren’t necessarily on the hook for $24 trillion, as the TARP IG Neil Barofsky once intimated, they are certainly on the hook for a lot more than is encapsulated in the TARP.

Quite a few of these sweetheart deals are ongoing, such as the latest retrading of AIG’s deal. This letter is from Alan Grayson to Ben Bernanke:

Dear Chairman Bernanke,

I write with concern about two announced deals that are lauded by AIG CEO Robert Benmosche as AIG’s plan to ‘pay back the taxpayer’. In reading through the deal, it looks to me like the Federal Reserve is simply engaged in yet another disguised bailout of AIG. It’s not surprising that the New York Fed continues to shovel money at AIG using its balance sheet, since this seems to be official policy, but this time, the bailout also involves cheating the IRS.

According to AIG’s November 6, 2009 10Q and the announcement from AIG, the deal works as follows.

• AIG will owe $25 billion less to the Federal Reserve Bank of New York, in return for which the FRBNY gets preferred shares in two AIG subsidiaries.

• AIG gets to appoint the entire board of managers for both subsidiaries ‘owned’ by the New York Fed.

• The New York Fed loses its status as a creditor in the event of a bankruptcy.

• AIG will take a prepaid charge to earnings of $5 billion in return for giving up part of the credit line from the New York Fed, allowing it to escape tax liabilities.

• These two subsidiaries are placed in special purpose vehicles (SPVs), and those SPVs will still be on AIG’s consolidated financial statement even after these subsidiaries are sold to the New York Fed.

• AIG gets to keep between 95-99% of the upside of anything beyond repayment of the preferred share amount.

• The valuation of these two subsidiaries is at the sole discretion of the Federal Reserve.

I don’t know how many more details have to leak out before we understand that getting the return on our investment from a few big banks who we continue to lend short-term notes to at absurdly cheap rates pales in comparison to all these behind-the-scenes bailouts. The people profiting most from this, the banking executives, offer less in social value than the men and women who clean up hospitals, and yet those workers don’t get trillions shoveled to them because of their assumed central importance to the global economy.

David Dayen

David Dayen

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