Bailout loss looks high despite bank stock

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NEW YORK --- Bank bailouts are turning out to be great business for the government. Unfortunately for taxpayers, other federal rescues will almost certainly wind up in the red.

The Treasury Department said Monday it will begin selling its stake in Citigroup Inc. at a potential profit of about $7.5 billion -- not a bad haul for an 18-month investment.

The move is a major step in the government's effort to unravel investments it made in banks under the $700 billion Troubled Asset Relief Program at the height of the financial crisis.

Yet a year and a half after Congress passed the big bailout, other parts of it -- particularly troubled automakers General Motors and Chrysler and insurer American International Group -- show no signs of being profitable.

Despite the returns from Citi and other banks, analysts and the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.

The money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout funds will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.

Based on Monday's share price, selling its 27 percent stake in Citi would add about $7.5 billion in profits. The stock fell 3 percent to $4.18 a share Monday after news of the planned Treasury sales, but that's still well above the $3.25 a share the government paid. The government also still holds Citi stock warrants, which will add to its profits down the road.

Overall, it's a 14 percent rate of return on the $165 billion invested in the biggest banks. Hundreds of smaller banks also received money and have been paying the government a steady stream of dividends and interest.

By comparison, someone who invested money in the Standard & Poor's stock index in early October 2008, when the bailout was passed, would actually have lost about 3 percent.

The government's bank profits can be misleading. The banks benefited heavily from other subsidies, including the $182 billion bailout of AIG. Tens of billions of that money went to banks that had suffered losses with AIG, and the banks didn't have to repay a penny.

"It's baloney to say we've made money off the bank bailouts," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund. "You have to add up all the money we've put into the economy and other firms" related to banks.

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johnston.cliff 03/30/10 - 03:37 am
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Associated Press = state

Associated Press = state "news" agency

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