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TARP windfall in the pipeline

The opinions expressed by columnists are their own and do not necessarily represent the views of

WASHINGTON -- President Obama will receive a huge deficit-reducing windfall in a few years when the U.S. Treasury recoups about $500 billion from its investment stake in the $700 billon economic bailout.


Who says so? None other than the nonpartisan Congressional Budget Office (CBO), which reported earlier this month that the fiscal 2009 budget deficit will top $1.2 trillion, not including the nearly $1 trillion that the Obama administration intends to spend on its own economic-recovery package.

CBO's staggering deficit projection made headlines, but its report also contained an equally newsworthy finding virtually ignored by the Washington news media because it would have undercut the lead they were peddling: a flat $700 billion giveaway by the Bush White House to Wall Street tycoons.

In fact, the Bush administration's expenditures in the Troubled Assets Relief Program (TARP), most of which went into huge loans to financially troubled banks, will end up costing taxpayers a fraction of its legislated price tag.

Instead of the full $700 billion when the money is disbursed, CBO's estimate of the "subsidy costs" related to TARP loans and other transactions will cost around $180 billion. Granted, this isn't chopped liver, but it's a far cry from nearly three-quarters of a trillion dollars that has been advertised in all of the financial-bailout stories.

What the news media rarely mention is that the Treasury demanded and got preferred stock, interest and other earnings for the billions it is shelling out to banks and other businesses.


When CBO totaled all of the government's outlays for this fiscal year in its latest budget review, it included $180 billion that it said was the true net cost of the money spent under TARP. "Broadly speaking, that cost is the purchase price minus the present values, adjusted for market risk, of any estimated future earnings from holding purchased assets and the proceeds from the eventual sale of them," CBO said.

How this works: The Treasury effectively bought assets from these banks. CBO projects that these assets after a period of time will be sold and then computes how much this will likely return to the Treasury based on very conservative estimates of their increased value and earnings.

Its estimates were based on all of the $700 billion that it expects will be spent through 2009, even though the Bush administration had only spent about half of that sum, and was headed into the second half with the incoming Obama administration's approval.

In a separate report released last week, the first of its semiannual reports of TARP expenditures, CBO provided additional estimates that showed how much smaller the bailout costs will prove to be. "Through December 31, 2008, the U.S. Treasury disbursed $247 billon to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP," CBO reported.


CBO estimates that the net cost of these transactions (the difference between what Treasury paid for these investments or lent these firms and their market value) amounted to $64 billion in 2008 dollars. In other words, CBO said, "we expect the government to recover about three-quarters of its initial investment."

What this means to Obama's performance on fiscal policy is huge. In a year or two, when the economy has recovered, the Treasury will be able to sell these assets for a tidy sum that will allow him to sharply reduce what is expected to be a monster budget deficit.

If CBO's projections are anywhere near to their estimated market value, his administration could see its budget deficit slashed by more than half a trillion dollars.

If that happens, Obama will have Bush's Treasury Secretary Henry Paulson to thank. The former chairman of Wall Street's Goldman Sachs, by making judicious loans that saved some shaky banks from going under, helped stabilize our credit markets at a critical juncture last year that prevented a collapse in the nation's financial system.

Paulson isn't getting much credit now, but when hundreds of billions in asset earnings begin to flow back to the Treasury, it will be the result of his wise investment decisions.

Some other administration might have played fast and loose with the TARP statistics, but Bush's Office of Management and Budget (OMB) account for the expenditures on a cash basis. That is to say, it entered the full amount of the loans "up front and will record future recoveries in the year in which they occur."


That approach "will show more outlays for the TARP this year and then show receipts in future years," CBO said.

Actually, CBO and OMB do not differ significantly in their assessments of the net cost of those (lending) transactions," the congressional fiscal-watchdog agency said.

It's time for the news media to be much more honest and accurate in its reporting on the TARP loans that have thus far been made to major financial institutions. The government is going to get back much, if not most, of this money -- and might even make a bit of a profit to boot.

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