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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U.S. Lowers Bailout Estimate By $200B

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U.S. Lowers Bailout Estimate By $200B

U.S. Lowers Bailout Estimate By $200B

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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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