The US government is expecting the cost of the Troubled Asset Relief Program (Tarp) to be $200 billion less than projected, helping to reduce the size of the budget deficit, a Treasury Department official said yesterday.
In August, the Tarp was forecast to ultimately cost $341 billion, once banks had repaid the government for
capital injections and other investments. Congress authorised $700 billion for the program in October 2008.
"The fact that they are spending less Tarp money means that recovery is better and stronger than expected, and that's all positive for growth," said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Calyon, the investment banking unit of France's Credit Agricole SA.
"It shows that things are progressing in the right direction."
Banks have paid back $71 billion so far, and a planned repayment by Bank of America would bring that figure to $116 billion. Treasury Secretary Timothy Geithner said in an interview last week that he expects the Tarp to get as much as $175 billion in repayments from banks by the end of 2010.
As banks repay their Tarp funds, the Treasury is disposing of the stakes it acquired through the program. To exit Tarp, and the additional oversight it brings, banks must buy back the government's preferred shares and also agree on how to dispose of warrants the Treasury received as part of the deals.
Goldman Sachs Group redeemed its warrants for $1.1 billion, while JP Morgan Chase, Capital One Financial and TCF Financial have opted to let the Treasury auction their warrants. That process is now under way.
The financial bailout program, begun under president George W Bush, has drawn fire from critics in Congress who say the government has done more to help Wall Street banks than average Americans. Last month Republican Representative Kevin Brady of Texas told Mr Geithner he should resign during a hearing of the Congress' Joint Economic Committee.
House Speaker Nancy Pelosi said last week that legislation is being written to use some Tarp funds to help local communities and small businesses. Pelosi said Tarp funds would be "appropriately used" to pay for new jobs promotion programs because "the more jobs we create the more money comes back into the public till" as tax revenue that will reduce the deficit.
House Republican Leader John Boehner said Mr Geithner should shut down the financial bailout program and use money left in the fund to reduce government debt. The US budget deficit reached a record $1.42 trillion in the 2009 fiscal year that ended September 30th as the government spent money on stimulus programs to pull the nation out of the worst recession since the 1930s and tax revenue declined.
"The deficit is definitely a concern that's overhanging the dollar, there's no doubt," said Calyon's Kotecha. "But there is a long way to go before the deficit improves to a point where concerns completely recede. On the margin, it's good news for the dollar but I don't think we will see a huge impact off this news."
The Treasury invested about $245 billion last fiscal year into US banks to shore up the financial system. In the long run, those investments are expected to turn a profit of $19 billion, compared with a previous estimate of a $76 billion cost, the Treasury official said yesterday.
The government's net cost for its investments in banks, auto companies and insurers came to $42 billion last
fiscal year, the official said, about $110 billion less than projected in August.
The Treasury official said the Tarp should be judged on the basis of its effects on the financial system, and not
its cost. The US economy expanded for the first time in a year in the third quarter, growing at a 2.8 per cent annual rate. The Standard and Poor's 500 Financials Index has jumped 140 per cent since March 6th, and the cost of three-month dollar loans in London between banks fell to 0.257 per cent on December 4th from 1.41 per cent at the beginning of the year.
Employers have cut 7.2 million jobs since the recession began in December 2007. Payrolls fell by 11,000 workers in November, the smallest decline in 23 months, figures from the Labor Department showed last week. The jobless rate declined to 10 per cent, from a 26-year high of 10.2 per cent in October.
Mr Geithner, in last week's interview, said the decline in job losses was "progress, but not good enough".
Bloomberg