Populist anger over the so-called bailout of banks has been boiling over the last year, stoked (as usual) by politicians and the mass media. Despite this anger, the latest report from the Congressional Budget Office (CBO) indicates that the government will turn a profit from part of that bailout.
IN PICTURES: 8 Tips For Starting Your Own Business

In October, 2008, the government set up the Capital Purchase Program (CPP), as part of the Troubled Asset Relief Plan (TARP). These programs were authorized by the Emergency Economic Stabilization Act of 2008 in an attempt to stem the panic afflicting the U.S. banking system at the time. The CPP involved the U.S. Treasury, purchasing dividend paying preferred stock, along with warrants to buy stock in the future, from hundreds of banks.

There was so much panic at that time that large investment banks like Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) even switched to a bank holding company structure so they would be eligible for the CPP. The U.S. Treasury ended up investing $205 billion in preferred stock issued through the CPP, and to date $130 billion has been redeemed by the banks that issued the securities.

CBO Report
The CBO estimates that, as of February 2010, the government has earned a profit of $2 billion on the CPP. Of course, this is just an estimate, as the CPP is not complete and outstanding preferred stock was valued on a present value basis, which can be notoriously inaccurate.

The CBO report said that the overall cost to the government of the entire TARP program is much higher, at $109 billion. However, a breakdown of this cost is interesting. American International Group, Inc. (NYSE:AIG) will cost the government $36 billion, and assistance to the automotive industry will cost $34 billion. Another $22 billion in costs comes from the Home Affordable Modification Program. This program was designed to help assist with people having trouble making mortgage payments.

CPP Buybacks
The latest two companies to buy back preferred shares issued under the CPP were Hartford Financial Services Group, Inc. (NYSE:HIG) and Discover Financial Services (NYSE:DFS).

Hartford Financial is conducting a dual offering of equity and debt to assist in the repurchase of $3.4 billion in preferred stock issued under the CPP. The offerings will consist of $1.95 billion of common and preferred stock, and $1.1 billion in senior notes. Hartford Financial will not redeem the warrants, and the U.S. Treasury will hold onto these securities for now.

Discover Financial Services announced that it had received regulatory permission from the U.S. Treasury to buy back $1.2 billion in preferred stock that was issued under the CPP. The company is raising $350 million in subordinated debt to help replace the capital.

The Bottom Line
Despite the rhetoric from pundits, the conclusion based on the latest TARP report from the CBO is that most of the costs of this program aren't even related to the banking system at all. (Take a look at how the crisis unfolded in An In-Depth Look At The Credit Crisis.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  3. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  4. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  5. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  6. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>

You May Also Like

Trading Center