AIG Helps Shrink TARP Costs to $30B

After two years of financial struggle, the US Treasury witnessed some relief on Tuesday, when the losses under the Troubled Asset Relief Program (TARP) were recorded at a historical low of about $30 billion. This was made by the refreshed calculations done after American International Group Inc. (AIG) accepted the TARP exit plan last week.

According to the latest estimates by the authorities, the $700 billion injected by the government through TARP in 2008, in order to bailout the financially hit companies, is estimated to cost about $50 billion, less than 10% of the total bailout amount. This cost was projected to be $341 billion in August last year, which then contracted to $91 billion in August this year. However, the Treasury further estimates a gain from the sale of common stock of AIG.

Last week, AIG had agreed to the US government’s plan, to hasten its loan repayment, by converting the various ownership interests of the latter to common stock, which will ultimately be sold to public investors from time to time, depending on the market conditions. This sale of AIG’s securities is expected to give an additional return of about $22 billion to the Treasury, which is estimated to pull down the TARP costs to about $30 billion, less than 5% of the total bailout amount.

Nevertheless, the $700 billion TARP had several parts, some of which were meant for sole expenditure such as the Home Affordable Modification Program (HAMP), wherein about $30 billion were injected to avoid home foreclosures.

Apart from this, most of the investment component returned safely to the government except that from the auto industry, wherein the Treasury projects a loss of about $17 billion, primarily due to the break-down of General Motors and Chrysler. However, banks played a major role in refilling the Treasury in time with the repayment of about $150 billion out of the $205 billion granted to banks. While 80% of the banks have already paid back their loans, the Treasury also earned about $27 billion through interest incomes or dividends and warrant sale. Going ahead, profits are also expected from the Citigroup Inc.’s (C) stock sale by the first quarter of 2011.

Overall, though the performance of the TARP is being taken with various views at different levels, the main aim of it is to re-establish the capital structure of the credit crisis-hit companies and streamline their operations and get them back on their feet. Profits earned out of it would just be a by-product and add value to the TARP. Nevertheless, the projection of earnings from AIG stock sale is too good to be credible currently, given the government’s time frame of 5-8 years before it could completely sell off its stock and exit AIG’s board.

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