U.S. Lowers Bailout Estimate By $200B

Large banks are repaying the bailout money they received much faster than expected. The administration says the cost of the TARP program will be about $200 billion less than estimated. Big financial firms are making profits again because the government has driven down borrowing costs for banks and safeguarded their debts.

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ROBERT SIEGEL, host:

Here's a riddle. When is it good news that you're losing $100 billion? Well, the answer is, when you expected to lose $300 billion. President Obama has some good news. It looks like the U.S. government is going to get a lot more money back from the banks that it rescued than anyone had predicted.

Adam Davidson is on NPR's Planet Money team and joins us from New York. Hi, Adam.

ADAM DAVIDSON: Hi, Robert.

SIEGEL: Adam, a year ago these banks were on the verge of collapse. And now Bank of America says it's going to pay back $45 billion, Citigroup hopes to pay back $20 billion. A lot of smaller banks have paid in full. How are they suddenly so healthy?

DAVIDSON: Well, it would be wonderful to say that all the banks in America had suddenly become completely healthy on their own, but of course that's not the case. The U.S. financial system is, in a very real way, an arm of U.S. Federal Reserve and U.S. Treasury Department policy. And while the direct lending that the TARP program represented, the 370 billion some-odd dollars that the U.S. directly gave to banks certainly helped a lot, far more important was the trillions of dollars in very low interest rate the Federal Reserve provided.

And also something called regulatory forbearance, which is basically the regulars say this is a global crisis. We're not going to pay so much attention to how healthy you banks are, we're going to let you tell us you're a bit healthier than maybe you would be under the strictest regime. Oh, and I almost forgot, the most important thing, the U.S. government let the world know: We're not letting any of the big banks fail. We're going to bail them out if it comes to that.

SIEGEL: Adam, last year, banks were going under or almost going under because they held so many toxic assets. What has happened to those toxic assets?

DAVIDSON: Well, they're certainly still around, although they might be a little less toxic. The banks and investors are used to assets that underperform, that are worth less today than they were a year ago. What made toxic assets toxic is that they were plummeting in value quickly and chaotically. It was basically just the freefall collapse of the U.S. housing market that made these subprime housing related securities not only worth less, but worth an unpredictable amount less. Now they're worth less for sure, they're worth pennies on the dollar or nickels or dimes on the dollar, but they're not worth that unpredictable amount. So, the banks still have lost a lot of money, but they don't have that uncertainly, that fear, that panic that characterized those toxic assets a year ago.

SIEGEL: Adam, the current economic crisis really began when the financial sector collapsed. Does that causal relationship work in reverse? That is, now that the banks are doing better, does that mean that we'll be out of the recession sooner?

DAVIDSON: Sooner, yes. I mean, a working banking system, a working financial sector is definitely a precondition for a healthy, modern economy. But we are now in a regular old-fashioned economic downturn. We have high unemployment. And we have lots of companies and investors sort of nervous about the future. And those are the makings of an ongoing economic problem, maybe not a full-on recession, but certainly a difficult economy. So, fixing the financial sector helps, but it does not cure the problem.

SIEGEL: You know, even in the age of trillions of dollars that we now live in, being off by a couple of hundred billion is quite a big error. And if indeed things are going that much better than what people thought, the expectations of where the financial system was a year ago are obviously very, very dire.

DAVIDSON: Yeah. A year ago, we were talking about the possibility of the cessation of the U.S. economy, of something far worse than the Great Depression. We're not talking about that anymore. However awful 2009 was, it was a much, much better year than most people in the profession thought it might be last December.

SIEGEL: Certainly for big banks.

DAVIDSON: Certainly for big banks, if not for the rest of us.

SIEGEL: Okay, Adam, thank you.

DAVIDSON: Thank you, Robert.

SIEGEL: That's Adam Davidson of NPR's Planet Money team.

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Obama, Republicans At Odds Over TARP 'Savings'

Projections of bigger savings from the financial bailout fund could be setting up a fight over how to use the anticipated $200 billion windfall. President Obama is likely to push for a new jobs program while congressional Republicans insist the money go to cutting the budget deficit.

The Government Accountability Office is expected to reveal in coming days that the Troubled Asset Relief Program, or TARP, will lose $141 billion over the long term instead of the $341 billion the government estimated in its August mid-session review. That difference is in part due to a better and faster-than-expected repayment from banks and other recipients of the bailout money.

"TARP has turned out to be much cheaper than we expected," Obama told reporters Monday during a White House visit with Turkey's Prime Minister Tayyip Erdogan, adding "but not cheap."

The president is set to give a speech on the economy Tuesday. Some have speculated that it would include a proposal to use the TARP savings for a new job-creation program as the nation's unemployment rate hovers around 10 percent.

On Monday, however, Obama declined to commit while leaving the door open, saying only that "some of the money can be targeted to deficit reduction," he said.

"The question is, are there selective approaches that are consistent with the original goals of TARP, for example making sure that small businesses are still getting lending that would be appropriate in accelerating job growth. And I will be addressing that tomorrow," he added.

White House spokesman Robert Gibbs told a media briefing, "No final determinations have been made," about how to spend the TARP savings.

The revised GAO figures take into account timely repayments. Bank of America said last week it was returning the entire $45 billion it borrowed as part of the program. That money will be added to the $71 billion already repaid to the government by financial institutions. The Treasury has also earned $10 billion in interest payments stemming from the bailout loans, an official told the Associated Press.

When Congress passed TARP in October 2008 during the depths of the financial crisis, TARP was authorized to spend $700 billion to bail out troubled financial institutions. In his first budget last February, the White House projected the need for $500 billion, including a $250 billion reserve. The August figure dispensed with the need for the reserve.

But Congress would need to go along with any such program, and GOP lawmakers are already skeptical of the White House stimulus efforts to date. Republicans are balking at the idea of yet another program, saying the money should be put back in the Treasury to reduce the massive fiscal deficit.

The Obama administration sees jobs creation as a key element in reviving the economy, because consumer spending accounts in one way or another for some 70 percent of gross domestic product.

Treasury Secretary Timothy Geithner indicated Friday that the administration was considering using any savings from TARP both on more job creation and to help reduce future budget deficits.

Geithner said the administration expected to have $175 billion in repayments from banks by the end of next year. Treasury has spent about $450 billion under TARP, including around $290 billion poured into banks.

Meanwhile, House Speaker Nancy Pelosi and other top Democrats have been drafting a jobs bill that would tap resources in the bailout program. Among the proposals being considered are funding as much as $70 billion in new transportation and infrastructure projects, providing new tax credits aimed at encouraging small businesses to hire workers, and providing additional aid to state governments to preserve public sector jobs.

The deficit for the 2009 budget year, which ended in September, hit a record $1.42 trillion and the administration in August projected a slightly bigger deficit for the current year.

From NPR reports and The Associated Press

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