[quote=TheBreeze]using your supersharp balance-sheet reading skills, where will the U.S. end up vis-a-vis the TARP? Up 10%? Down 35%? Will taxpayers lose it all? Will the government come up with some other feces-filled plan to bail out the TARP so that it looks like the TARP actually makes money in the end?
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Allan can answer this himself, but I’ll give you my own stab, just as an update.
Let’s assume that 30% of the Big Bank TARP preferred ultimately gets converted to common and ultimately loses half of its value (and pays no 5% dividend). Further let’s assume that 5% of the community-bank TARP preferred goes to zero. (I’ve seen some bad TARP grants in this group – likely to go to zero – but it’s a small percentage of the total.) So, that’s a 20% permanent loss of principal, with just 65% of the TARP preferred still paying the 5% dividend. Add that up over 5 years and the Treasury ends up getting back 83% of its capital. And that’s a pretty dire scenario – that probably corresponds with a 15% peak-to-trough decline in GDP. Possible but not probable.
The Treasury obviously thinks it’s going to get back 125% of the capital (that is, everyone pays their 5% dividend and pays back the principal in 5 years). I think that’s too optimistic. Possible but not probable.
I think we probably end up with somewhere between 90% and 100%, with a handful of shnafus being offset by the vast majority making their dividend payments and returning the principal. I’d say the 90% confidence band is between 80% and 110% (the percentage of capital returned to the Treasury).
And if I’m wrong, we can come back here and you can mock me and I’ll say, “Yep, I was wrong. Moving on.” But let’s give it time to play out. I know Americans are an impatient lot, but…
Now, I can’t speak for the AIG funds. There’s gotta be a big loss in that sucker. But I don’t know how big (does anyone?). My guess is that the longer the govt. has to work out AIG and sell off the businesses, the lower the ultimate loss will be. In the meantime, however, anyone at AIG who won’t work without a bonus should attempt to find other employment. I’m reminded of a quote from some general (can’t remember the name): “The graveyards are filled with ‘indispensible’ men.”
