Stock Market Update: Monday, August 31, 2009

The Sunday New York Times ran an article titled "As Banks Repay Bailout Money, U.S. Sees a Profit" that attempts to determine how much the government has made from the repayment of TARP money and the related warrants. The news, so far, is pretty good:

§ The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

§ So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit. The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans.

§ But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

That's the good news but there is still the very real potential that we could take some big hits from some of our flakier peers . . .

§ But all the profits taxpayers have won could still be wiped out by two deeply troubled institutions. Both Citigroup and Bank of America are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove "toxic" because they cannot attract buyers, they could leave large holes in the banks' balance sheets.

§ The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

And, just as you would expect, this news had no impact on the stock market today . . .

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