TARP Becomes More Profitable - Analyst Blog

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With the reimbursement of $210 million of bailout money by Bank of Kentucky Financial Corp. ( BKYF ) and First Midwest Bancorp Inc. ( FMBI ), the U.S. Treasury has recovered nearly $258 billion from the bailed out banks. Approximately $245 billion was given to these banks as part of their participation in the Troubled Asset Relief Program (TARP) during the latest recession. The amount was procured through repayments, interest, dividends and other income, enabling the Treasury to make a profit of about $13 billion.

Back in 2008, when the financial crisis was at its peak, Bank of Kentucky Financial and First Midwest Bancorp had received TARP money. Originally, Bank of Kentucky Financial had received $34 million as bailout money. Of this amount, on Wednesday, Bank of Kentucky Financial repurchased $17 million of preferred shares that were held by the Treasury as a part of the TARP and also paid $18,888 as accrued dividends. Earlier in December 2010, the company had bought back about $17 million preferred shares from the Treasury.

Similarly, First Midwest Bancorp repurchased $193 million of preferred shares and paid $214,444 as accrued dividends to the Treasury. Furthermore, taxpayers received nearly $32.5 million as dividends from these two companies over the total period of investments.

A Long Way Ahead?

Of the total $700 billion bailout money, banks, other financial institutions and U.S. carmakers received $413.4 billion, of which, about 77% (nearly $317.6 billion) has been recovered by the government till date.

However, the Treasury still holds significant stakes in other rescued companies, including big names like General Motors Company ( GM ), Chrysler, American International Group Inc. ( AIG ) and Ally Financial (previously known as GMAC). Even after the sale of 200 million AIG shares in May, the Treasury still owns about a 77% stake (down from 92%) in the company. Additionally, the Treasury owns about $11.3 billion AIG preferred shares and plans to exit from its holding on the company over the next couple of years.

Similarly, Chrysler has repaid $10.6 billion of its total $12.5 billion TARP loan and General Motors has refunded $8.1 billion of the total $13.4 billion it borrowed from the Treasury. Overall, out of the total $80 billion given to the auto industry, only $29 billion has been recovered.

TARP: A Success Story?

The government's expected recovery from the bailed out institutions along with dividend and interest income will more than offset costs related to the pending deals. Looking back at a calculation released by the Treasury in March, TARP will earn about $23.6 billion by 2013.

Also, considering the effectiveness in easing credit and capital market pressure, restoring confidence in the financial system and recovering the injected money at a lower-than-expected cost, it can be concluded that the government's highly criticized bailout program has finally turned out to be a winner.

Moreover, the final success of TARP is probably still in the works. While most of the major financial institutions have cleared their dues, many banks are still to repay their bailout loans. However, the estimated overall cost has been continuously falling. Also, the repayment of the bailout money coupled with the repurchase of warrants is encouraging and can be seen as an indication of recovering financial institutions along with the economy.

Though a major chunk of the TARP fund will likely be absorbed by the housing programs initiated by the government, the Treasury's recovery mission continues, raising optimism for greater success.


 
AMER INTL GRP ( AIG ): Free Stock Analysis Report
 
FIRST MIDWST BK ( FMBI ): Free Stock Analysis Report
 
GENERAL MOTORS ( GM ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AIG , FMBI , GM

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