Treasury Investments Already $16 Billion in the Red

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Larry Downing / Reuters

Interim Assistant Treasury Secretary Neel Kashkari testifies before the U.S. House Financial Services Committee hearing on oversight concerns regarding Treasury Department conduct of the Troubled Assets Relief Program in Washington, D.C.

Two months in, and already $16 billion in the hole. That's how much the Treasury's Troubled Asset Relief Program (TARP), which was approved by Congress in early October, has already lost on its investments, according to a TIME analysis. (Read the top 10 financial collapses of 2008.)

The investment losses are sure to rankle lawmakers already unhappy with the way the Treasury has handled the first stage of the $700 billion financial-rescue plan. In a hearing on Wednesday, members of the House Financial Services Committee said the Treasury has not done enough to slow foreclosures, increase bank lending or protect taxpayers' money. Lawmakers questioned Assistant Treasury Secretary Neel Kashkari on why his agency had not yet hired an outside firm to help manage its investments. They also wanted to know whether the Treasury Department had set a limit on executive compensation at the firms in which Treasury has invested, which lawmakers say was required in the early-October bill. Lawmakers are concerned that financial firms receiving TARP funds will use that money to pay executive bonuses or pursue mergers instead of making loans.

"You were supposed to set an appropriate level of executive compensation at the firms taxpayers were investing in," said Representative Brad Sherman, a Democrat from California. "But the record should show that Mr. Kashkari is unwilling to say whether he will allow a $30 million bonus."

Also out on Wednesday was a report by an oversight board appointed by Congress to evaluate Treasury's economic-rescue efforts. The board, which is headed by Harvard law professor Elizabeth Warren, criticized Treasury for failing to set up a program to monitor the effectiveness of TARP. In particular, the oversight board said it was important for Treasury to institute a method to determine whether the banks receiving government funds are using the money to make loans. "American taxpayers need to know that their money is having a tangible effect on improving financial stability, credit availability, and the economy as a whole," the oversight board wrote. "Treasury needs to provide a detailed assessment of whether the funds it has spent so far have had any effect — for better or worse — in these areas."

Kashkari told lawmakers that it is very difficult to figure out how the funds that banks have received from the government are being used but that he thought the moves Treasury has made so far have gone a long way toward stabilizing the economy. Kashkari also said that Treasury was interested in stemming foreclosures, but it would be very difficult to formulate a cost-effective program. "I am very concerned about redefaults," said Kashkari. "The plans we have passed so far have been thoughtful, but they haven't helped as many homeowners as we had hoped."

The Treasury Department has said it will invest up to $335 billion of the $700 billion bailout fund in banks and other financial institutions. It is using the money to buy preferred shares in banks, a move it began in late October. So far, it has invested $165 billion in 88 institutions, according to Treasury's website. That does not include the $40 billion the government has promised to shore up ailing insurer AIG or an additional $20 billion in funding for Citigroup, which was approved in late November when the financial giant appeared to be near failure.

Many of those investments have lost money. The preferred shares the government purchased don't trade, but many of the Treasury-assisted banks already have existing preferred shares that do. And preferred-share experts say the stock that was issued to the government would likely carry similar prices to the company's existing offerings. What's more, the government has the right to trade its shares whenever it wants. If it were to do that now, it would surely be out taxpayer money.

For instance, the government completed its initial investment of $25 billion in Citigroup in late October. Back then, a preferred share similar in type to those purchased by the government was trading at $15.60. Since then, the shares have fallen 12%, to a recent $13.67. To figure out the total return of Treasury's portfolio, TIME compared the returns of an index that tracks financial preferred shares with the dates on which Treasury made its investments. All told, in about six weeks the Treasury Department has lost an estimated $16 billion, or about 10% of the money invested so far — a paper loss, but a loss just the same.

In addition to the preferred shares, the Treasury Department is also getting warrants from the banks that give it the right to purchase additional shares of the company equal to 15% of its investment. With a $10 billion investment, then, Treasury gets $10 billion in preferred shares and the right to buy an addition $1.5 billion in additional plain-vanilla stock — the kind regular investors would buy. The twist is that the government can buy those shares at a set price — an average of what the company's stock was trading at during the 20-day period prior to its initial investment. So if the bank's stock price rises from where it was in, say, mid-October, the government will make money on its investment.

But the warrants don't look too promising, either. The stocks of most of the banks the Treasury has invested in have fallen in the past two months, rendering the warrants worthless, at least for now. Some of the warrants may never have any value. Shares of Goldman Sachs, for instance, were trading at an average of $113 in mid-October. That means the stock would have to climb nearly 60% from its current $71 before the government would be able to turn a profit exercising its Goldman warrants.

Proponents of Treasury's moves so far say the point of the government's rescue plan was not to make money but to save the banking system from collapse. What's more, the preferred shares entitle the government to a 5% dividend, which would be an annual payment of $8 billion on its current investment but could rise to nearly $15 billion. "In theory, if the government wanted to sell [today], it would not get 100 cents on the dollars it invested," says Jean-Francois Tremblay, who follows financial institutions at bond-rating agency Moody's. "But the government can just hold on to its investment and wait until it gets paid back."

Still, one of the arguments for the $700 bailout has long been that there was a strong possibility that the government's plan would be able to stabilize the banking system and make money for taxpayers at the same time. For now, that doesn't seem to be the case.

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