8.5% Return on Bank Bailout Investments Timely For Federal Reserve
by Hiland Doolittle
In a timely release, the Federal Reserve announced a stellar 8.5 percent return on investment on its highly scrutinized bailout of 49 financial institutions. The results are inclusive of transactions completed prior to March 30, 2010 in repayment of assistance provided to critically wounded firms at the outset of the recession. Firms with outstanding shares held by the U.S. Treasury are not included in the release.
Sixty-four of the institutions that originally utilized proceeds from the Troubled Asset Relief Program have fully repaid the government. Some 600 smaller financial institutions still remain in the TARP program.
Taxpayers have resisted the lack of transparency and the “behind closed doors” mentality of many of the bailout transactions. The standards used to save these financial institutions would be unacceptable today. Most taxpayers believe the very beneficiaries of the TARP program caused the recession through high risk, high reward lending practices.
The revelation that these same firms were protected against irresponsible lending actions and in fact bailed out by loss-strapped taxpayers has set off intense debate in Washington and on Main Street. The Obama Administration, the Federal Reserve, Treasury Department and SEC have launched multi-dimensional initiatives to prevent similar practices.
The Fed’s “feel good” announcement emphasizes the returns from financial behemoths Goldman Sachs and Bank of America but downplays the open obligations of firms like Citigroup. Taxpayers reaped a spectacular 20 percent return for Goldman. Combining the returns from the large institutions with 18 smaller firms, the gain has been 7.6%.
The combined outstanding liabilities held by the 600 smaller lenders still exceeds $130 billion. The overall success of the TARP program may well lie in the ability to recover those investments.
The New York Fed Speaks Out
The Federal Reserve of New York has finally chosen to divulge some details concerning the billions in high-risk investment connected to the rescue of American Insurance Group (AIG) and Bear Stearns. Unlike the Federal Reserve’s 8.5 percent gain, the news appears tainted with more promise than reality.
However, the release of the information is a step forward for the N Y Fed, which has maintained tight security surrounding its activity. The NY Fed launched three entities to hold the toxic assets it was forced to acquire in connection with the failing giants.
Maiden Lane was created in March 2008 to expedite the sale of Bear Stearns to JPMorgan Chase and Co. The corporation controlled approximately $30 billion of assets the new purchaser was unwilling to acquire.
Maiden Lane II and Maiden Lane III were formed to support the $182 billion taxpayer bailout of AIG. The NY Fed has refrained from public releases identifying the nature and composition of many of these toxic assets.
Certain assets are now identified as the risky credit derivatives known as credit-default swaps that are completed when the institution defaults on debt. Maiden Lane also holds about $1.49 billion in troubled residential Fannie Mae and Freddie Mac-backed mortgage securities.
Former Treasury Secretary Paulsen and present Treasury Secretary Geithner have been criticized for not demanding concessions from the bailed out banks. This criticism has led to murmurs of favoritism and backdoor deals.
California Representative Darrell Issa has been the most consistent critic of the Federal Reserve and Treasury Department’s involvement in the TARP. NY Fed Chair William Dudley’s limited release was in response to pressure from Issa, who deemed the release incomplete.
Tags: 2009 Stimulus Package, Economy, Stimulus Plan, TARP
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
