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Look Who's Pocketing the Profit from TARP


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IPOs Turning Point
Richard Drew/AP
As recent initial public offerings go, it wasn't one for the ages. Ally Financial (ALLY) listed on the stock exchange in mid-April, and its shares dropped under their listing price in the days following the issue. Investors didn't hit a home run with the offering, but the selling shareholder reaped a nice windfall (around $2.4 billion).

That's a good thing, because that seller was the U.S. government, in the form of the Treasury Department.

The Feds had held a majority stake in Ally Financial, and the IPO was the latest divestment in the government's once-lambasted Troubled Asset Relief Program. With the sale, the public notched another win in a program that's been more successful than many dared hope -- and is returning a bit of profit to a group of people that could use the money.

A Big Lifeboat

TARP was launched in 2008 to bail out the many organizations -- mainly financial companies and automakers -- affected by the financial crisis. It was a monster of a program, eventually handing out $423 billion and change, a great deal of which was exchanged for various forms of equity and debt.

A big chunk went to financials crippled by the near-vaporization of key assets during the crisis; two notably big charity cases were sprawling financials Citigroup (C) and Bank of America (BAC), which received $50 billion and $45 billion, respectively.

This was topped by insurer AIG (AIG), recipient of nearly $68 billion, while JPMorgan Chase (JPM) and Wells Fargo (WFC) were given $25 billion apiece. Sputtering car manufacturers like General Motors (GM) were given fresh tanks of financial gas, with GM taking over $50 billion.

Handing over hundreds of billions of dollars in hard-earned taxpayer money to a cabal of seemingly rich companies attracted heaps of criticism. Given the sickly economy, how in the world could the government donate money to entities that not only had plenty, but found themselves in the mess due to their own mismanagement and negligence?

Speedy Recovery

But then a funny thing started to happen. Instead of squandering the cash and plunging further into the abyss, many TARP recipients began to turn their businesses around.

AIG, for one, slimmed down and narrowed focus by selling a bunch of not-particularly-core divisions. It also made a smart move in appointing a no-nonsense veteran executive -- Bob Benmosche -- as president and CEO in mid-2009.

The insurer's rebound was fast. From a gut-wrenching net loss of $10.4 billion that year, the company flipped into the black to the tune of $9.9 billion in 2010. And it's posted a net profit in every fiscal year since then.

Meanwhile, the "big four" incumbent banks (Bank of America, Citigroup, JPMorgan Chase and Wells Fargo), despite some weak quarters here and there, have generally been in good financial health and have performed well relative to those dark days. All four have been paying regular quarterly dividends to their shareholders for some time now.

Many of the program's recipients repaid their benefactor quickly. In mid-2009, less than a year after receiving their bailouts, nine big financials-- including JPMorgan Chase -- announced they had returned their TARP funds. That December, Bank of America made a similar announcement that it had retired the $45 billion the government had bestowed on it.

Pocketing the Difference

All told, according to the Treasury's latest reckoning, the Feds have taken in $438.4 billion in returns from the program, against disbursements of $423.4 billion. This is largely because much of the government's financial relief was given in return for equity in the form of preferred shares (which often pay higher-than-average dividends) and warrants. In more than a few cases, these ended up turning a profit.

Looked at from a purely investment perspective, TARP has so far been profitable by more than $16 billion, returning nearly 3 percent on the original mammoth investment.

At the end of the day, that money will go right back into the government's cash register. In other words, the taxpayers are benefiting -- the more money in the till, the lower the burden on them to help shore up public finances.

TARP is almost at an end. Again according to Treasury figures, only $4.7 billion remains outstanding, so the program should wrap up rather soon.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends AIG, Bank of America, General Motors and Wells Fargo, and owns shares of AIG, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. The Motley Fool has the following options: long January 2016 $30 calls on AIG.


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