The Troubled Asset Relief Plan (TARP) has come under much criticism and has been labeled a bailout by the public and the media. It is possible, however, that when everything is paid back years from now, the Capital Purchase Program (CPP), an important part of the TARP, may actually be highly profitable for the government.
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The CPP involved the banks selling preferred stock to the U.S. Treasury. This preferred stock paid a dividend to the government, and the government also received warrants allowing it to purchase more stock in the future.

Virtually every bank that participated in the CPP has faithfully made these dividend payments. The total amount of dividends received by the U.S. Treasury has reached $7.3 billion since the program started.

Perfect Timing
Pacific Capital Bancorp
(Nasdaq:PCBC) was one of the few that has not made all the payments. The bank announced in June 2009 that it was suspending dividends on its common and preferred stock to try to build up its capital levels.

The real upside for the government, and by extension the taxpayer, is the warrants that the Treasury received as part of the injection of capital. Many investors might have assumed that these warrants were worthless because they were out of the money; however, the government timed its warrant investment perfectly, and received the warrants at the trough of the cycle. Now that prices have moved higher, many of these are in the money. In essence, the government received warrants worth billions on the U.S financial system, when it was trading at or below book value. When the sector recovers back to normal valuations of two to three times book value, the value of these warrants will soar.

Bank Buy-Backs
Several banks have bought back the warrants rather than wait for the government to exercise them. Northern Trust (Nasdaq:NTRS) just repurchased its warrants and paid the government $87 million. The company said the annualized return to the taxpayer for the preferred and warrant investment was 14%.

Annualized returns are just as good for the government investment in the original CPP recipients. Goldman Sachs Group Inc. (NYSE:GS), Morgan Stanley (NYSE:MS) and American Express Co. (NYSE:AXP) provided returns of 14.18%, 12.68% and 12.23%, respectively, when the dividends on the preferred and warrant buy back is totaled.

Biggest Return
The biggest score for the government may come from the least likely source. The government owns 34% of Citigroup (NYSE:C), which has been ridiculed as a zombie bank. The Treasury converted the original CPP preferred shares into common at $3.25 per share earlier in the summer. Citigroup closed at $5.05 on August 27, 2009.

Bottom Line
The conventional wisdom was that the government was wasting its money when it invested in the U.S banking system in late 2008 and early 2009, an attitude fed by the sensationalism practiced by many in the media. However, when the final preferred issue is paid back, the CPP might be seen as a great "value" investment. (Read more about the financial crisis in our article The Fall of The Market In The Fall of 2008)

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