A new television advertisement from
American International Group, Inc.
) shows the company thanking America for the bailout it received
from the Troubled Asset Relief Program (TARP). AIG received a
massive $182.3 billion, $70 billion of which was received from
the Treasury and the balance from the Federal Reserve Bank of New
Both the Federal Reserve and the Treasury have already recovered
the full amount from AIG. An additional $22.7 billion of positive
return have also been generated from this exercise. The ad
mentions this clearly and thanks the taxpayer for that too.
However, this campaign may have little effect since it emerged
that the company was considering suing the government for the
unfair terms under which it received the bailout.
The company was considering joining a $25 billion lawsuit by
former CEO Hank Greenberg which claims the terms under which the
bailout was provided was unconstitutional. Following widespread
public outrage, the firm has now decided not to join the lawsuit.
However, this has once again brought to the fore the discontent
about TARP, which is close to recouping the amount it invested in
its bailout initiative.
Nearly $418 billion has been spent on the TARP initiative, and
the Treasury's sale of outstanding AIG shares has been a big step
in bringing the process to a close, at least in the collective
mind of the public. The other move has been the Treasury's
decision to sell its 32% stake in
General Motors Company
) within the next 15 months. Nearly $49.5 billion was injected
into the automaker to keep it from folding.
It is generally being agreed that TARP is a success, but a
qualified success at best. The Treasury has now received $375
billion of the $418 billion it spent. But these returns could
have been greater. All banks and financial institutions were
disbursed funds under identical terms irrespective of their
As a result, relatively robust institutions such as
The Goldman Sachs Group, Inc.
JPMorgan Chase & Co.
) paid a 5% annual dividend on the preferred shares that the
Treasury received. This was the same rate at which those with far
weaker financial health received funds.
Berkshire Hathway Inc.
) invested $5 billion in Goldman Sachs September 2008 at 10%.
This has resulted in a profit of $3.7 billion compared to the
$1.1 billion positive return the Treasury has received for the
$10 billion that it invested.
The more fundamental issue is whether legislation and monitoring
has been successful at curbing the unhealthy business practices
that caused the crisis in the first place. The New York Federal
Reserve has said that with the help of government support, banks
have made some loans that are even more questionable.
Additionally, the Dodd-Frank Financial legislation and the
Volcker Rule which was incorporated into it were designed to curb
the practice of proprietary trading. This is a situation where a
bank or financial institution invests its own funds in stocks and
bonds instead of using funds received from depositors. However,
the Volcker Rule only restricts short-term investments. JPMorgan
) had announced that they would shut down or reduce the size of
such units to comply with these provisions.
But that has not ended the tendency to indulge in risky bets.
According to a report by Bloomberg Businessweek, Goldman Sachs
has a unit named Multi-Strategy Investing that utilizes about $1
billion of the bank's own funds to make investments. Short-term
trades are now defined as those which last over 60 days or less.
An email for a spokesman for Goldman Sachs claims that this new
unit is involved only in long-term investing and lending. The
Bloomberg Businessweek report claims that the unit acts like an
internal hedge fund.
The major complaint is that the bailout has done little to aid
distressed homeowners. Only $6 billion was spent on combating
foreclosures and the Obama administration's recent attempt to
expand the program has also received little support.
There is no doubt that TARP pulled the economy back from the
brink, but the wisdom gleaned from this experience must not be
forgotten. That will possibly be its greatest benefit.
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