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The Government: Worst Investor Ever?

In fall 2008, Motley Fool CAPS player TARPedBanks was set up to track the performance of banks that took money from the U.S. Treasury's Troubled Asset Relief Program, or TARP, and, on at least two occasions, that player has earned the title of Bottom Fool -- the worst investor in all of CAPS. But Foolish minds might ask if Treasury Secretaries Henry Paulson and Timothy Geithner are really that bad at managing taxpayers' investments. Let's run it down.

TARP was created in fall 2008 "... to stabilize the financial system by providing capital to viable financial institutions of all sizes throughout the nation."The program was funded with $700 billion of spending authority. In October 2008, Treasury purchased preferred stock in nine financial institutions. TARP now consists of 10 subprograms covering investments in banks, auto companies, AIG (NYSE: AIG  ) home loan modification, etc. Somehow, Congress and Treasury forgot to include special support for Fool writers.

TARP and the banks
The core of TARP are the Capital Purchase Program bank investments along with additional investments made in Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . Treasury invested more than $240 billion in these programs, nearly half of all TARP funds used or committed. In addition to preferred stock, Treasury received warrants with the bank investment and, as shown in this table (numbers in millions), those warrants have generated some nice returns for taxpayers.


TARP Investment

Amount Repaid

Dividends Paid

Security Sale Proceeds (3)

Common Stock Held

Bank of America

$45,000 (1)





Bank of NY Mellon







$45,000 (1)

$45,000 (2)



$23,035 (4)

Goldman Sachs (NYSE: GS  )






JPMorgan Chase (NYSE: JPM  )






Morgan Stanley (NYSE: MS  )






State Street






Wells Fargo (NYSE: WFC  )






All Other Banks






Totals (1)






*Source: and author's calculations. All values in millions.

(1) Values include both Capital Purchase Plan and Targeted Investment Plan.
(2) Citigroup repayment includes $25 billion converted to common stock.
(3) Includes warrant sales and initial 1.5 billion-share tranche of Citigroup common stock.
(4) Remaining 6.2 billion shares of Citigroup common stock at $3.72 per share.

All in all, Treasury didn't do too badly for us with the bank investment portions of TARP. Even if we assume the remaining preferred stock only nets $0.50 on the dollar and we get nothing for the warrants still held, taxpayers made nearly 6% on the banks -- not great, but a lot better than many expected when the program began. Results are summarized below.

Cash Invested

Cash Returned

Securities Held

Realized and Unrealized Gain







*Source: and author's calculations. All values in millions. Cash returned includes preferred stock repayments, warrant sales, and first Citigroup common stock sale. Securities held includes remaining preferred stock valued at 50% of face value and Citigroup common stock.

Fifty cents on the dollar may be a bit optimistic because a number of the banks still in the program are behind on dividend payments. Assuming the current market price for Citigroup holds, about $0.28 on the dollar for the rest of the preferred stock holdings would get taxpayers out even on the bank investment part.

The rest of TARP
Not bad on the banks, but what about the rest of TARP? Here's where the program racks up some sizable loss projections. Of the other eight programs, three are expected to show more than $4 billion of losses, but those three really put a dent in the taxpayers' wallets.


Amount Invested/Committed

Expected Gain or (Loss)

Auto Investments






Asset Guarantee Program



Public-Private Partnership



Home Affordable Modification Program



Community Banks






*Source: and author's calculations. All values in millions. Investment amounts include both funds expended and unexpended projections, approximately $75 billion has yet to be spent.

Combined with the bank results, TARP is projected to lose a little more than $100 billion. Add in roughly $15 billion of finance charges because all that money had to be borrowed,  and each person in the U.S. will lose about $400 -- or about 20% of the more than $535 billion expected to be "invested" -- with TARP.

F-Troop (Fed, Fannie, and Freddie)
Outside of TARP, ye ol' taxpayer coughs up some serious coin to pay for bailouts -- and we don't even know what the tab might be.

The Federal Reserve implemented a number of policies and programs to stabilize the financial markets, including:

  • Near-zero discount rates.
  • Expanding the types of securities accepted as collateral.
  • Purchase of government debt, Fannie Mae and Freddie Mac paper, and mortgage-backed securities.

Many of these programs have been ended, but detailed financials haven't been released and we don't know if the Fed has turned a profit or a loss on the programs. Secretary Geithner showed a projected gain of $115 billion from the Federal Reserve programs in a recent report to Congress. Because the Fed can create money out of thin air, the primary cost to taxpayers is risk of future inflation and a weaker currency from the increased money supply, along with economic slowdown when and if the Fed unwinds. To date, we haven't seen out of control inflation or many signs of the Fed unwinding, but that doesn't mean we won't.

And then there are the twin mortgage money pits, Fannie Mae and Freddie Mac. Treasury's primary support for Frannie is the direct purchase of mortgage securities and an unlimited backstop of preferred-share "investments." When the Treasury's mortgage security purchase program ended in December 2009, it had purchased more than $220 billion face value of "Frannie" mortgage-backed securities. As of May 2010, nearly $175 billion is still on the books. We don't know the market value of that paper. In the same report mentioned above, Geithner estimated the MBS purchases would result in an $18 billion gain to taxpayers while the preferred stock purchases would result in a loss of $103 billion to $167 billion. The final results will depend heavily on the housing market.

If we believe current projections, the assortment of financial bailout programs will end up costing taxpayers somewhere in the neighborhood of $100 billion to $150 billion. Keep in mind, the primary objective of these programs is to stabilize financial markets, not turn a profit.

Fools need to be very careful making investment decisions on the assumption that the government is backstopping some company. Just ask anyone who held shares of General Motors last year. In addition, where government controls the company, there's no guarantee that government interests align with those of shareholders. Fannie Mae and Freddie Mac are being run with a primary goal of stabilizing mortgage markets. That's well and good, but may not put as much focus on turning a profit (or minimizing losses) as shareholders would like to see.

Do you think we're getting our money's worth from the financial support programs? Weigh in with a comment below.

More banking Foolishness:

Fool contributor Russ Krull owns shares of Wells Fargo, but does not have a financial position in any of the other companies mentioned in this article. He follows bank bailouts as TARPedBanks on CAPS. The Fool has a disclosure policy that has never needed a bailout.

Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2010, at 7:05 AM, jlustig2 wrote:

    $400 a person to halt a potential collapse of the global financial system?

    Sounds pretty reasonable to me given the other possible outcomes.

    Oversimplified look, but you know, maybe this whole thing worked?

  • Report this Comment On June 15, 2010, at 9:28 AM, BMFPitt wrote:

    I wouldn't call the US Government an investor, because the goal of an investor is to make money. I would call it more of an embezzler (or perhaps a money launderer, especially in the AIG deal) than an investor. In that context, they have been possibly the most successful ever.

  • Report this Comment On June 15, 2010, at 9:31 AM, BMFPitt wrote:

    "Oversimplified look, but you know, maybe this whole thing worked?"

    It "worked" exactly as it was designed to. It bought 2-3 years of extra time to load up on more debt and make the situation drastically worse than it would have been otherwise, while rewarding all those involved. That was about 2 yeaars ago, and the wheels are now falling off.

  • Report this Comment On July 09, 2010, at 11:14 AM, KerrisdaleCap wrote:

    At Kerrisdale Capital, we looked at the banks which are missing their TARP payments and were surprised by what we learned. Our analysis can be found here:

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