Uncle Sam's Big Bailout Win: A $25 Billion Profit for Taxpayers

Uncle sam
Uncle sam

When Congress announced in 2008 that it would be lending $700 billion in taxpayer money to bail out some of America's biggest (and most careless) banks, a lot of people thought this was a really bad idea.

But whether or not you think the billions invested in saving the likes of Citigroup (C), J.P. Morgan Chase (JPM), AIG (AIG), and General Motors (GM) was worth the cost, the companies were saved. And as we learned this week, at least one of Uncle Sam's bailout investments actually turned a profit.

Returns That Even Warren Buffett Would Love

As part of the Housing and Recovery Act of 2008 ("HARP" -- a cousin to "TARP"), the government in 2008 embarked on a project to inject "liquidity" into the housing market. Treasury spent a total of $225 billion buying mortgage-backed securities from Fannie and Freddie in 2008 and 2009.

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Then, last year, Treasury began selling back to private investors the toxic mortgage-backed securities it acquired while bailing out Fannie Mae and Freddie Mac.

Between interest collected on these securities while they were in government ownership, and proceeds from their sale back into the market, Treasury says it has netted $250 billion total -- for a whopping $25 billion profit.

Pretty savvy, huh? Well, sort of.

How'd They Do That?

While we can all be thankful that the government sidestepped a loss on HARP, its performance isn't quite as astoundingly good as the administration would like you to believe. Consider:

1. It took the Treasury about 16 months to "earn" its $25 billion profit. On a $225 billion initial investment, that works out to about an 11% total return, or about 8.3% per annum. While a profit is better than a loss, most investors know that this is actually subpar for returns on the stock market.

2. The $225 billion that Treasury "spent" to "buy" these securities wasn't even real money. Not in the sense of the way ordinary people invest, at least. Think about it. Before you buy a stock, you have to first earn a paycheck, deposit the paycheck, then withdraw some of your savings and invest them in a stock, right?

But what did Treasury do? It skipped past all the boring stuff -- work, savings, investment. Treasury basically just turned on the (virtual) printing presses, created some money, and spent it. It went directly to "GO," collecting $200 (or rather, $225 billion) en route.

3. It had all the time in the world to let the investment pay off. Unlike the banks and companies it saved, and unlike you and me, Treasury is part of the federal government -- an institution with at least a two-century lifespan (and hopefully a bit more). Longer-lived than most investors, Treasury had the ability to buy Fannie's and Freddie's distressed assets and then wait as long as necessary for these assets to regain some value.

It was only 16 months, as it turned out. But if need be, Treasury could very well have sat on its toxic nest egg for years, or decades, waiting for profits to hatch.

If Only We Were All So Lucky

So here's the upshot: Yes, Treasury made a profit on the mortgage-backed securities that it acquired from Fannie Mae and Freddie Mac. Since it saved us all from taking a loss, bully for it -- but don't get too carried away with the applause.

Unlike ordinary investors, the Treasury had unlimited access to funds, unlimited ability to withstand losses without suffering a margin call, and unlimited patience to wait for its "investment" to bear fruit.

If you had all that at your disposal, you could earn $25 billion, too.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Citigroup and J.P. Morgan Chase.


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