The U.S. government's rescue of wobbly companies and financial markets is starting to look far less expensive or long-lasting than once feared.
As momentum grows at companies that looked like zombies just a few months ago to repay taxpayers for lifelines they got during the financial crisis, the projected cost of the bailout is shrinking to just a fraction of previous estimates. Treasury Department officials say the tab is likely to reach $89 billion, which includes the Troubled Asset Relief Program, capital injections into Fannie Mae and Freddie Mac, loan guarantees by the Federal Housing Administration and Federal Reserve moves such as buying mortgage-backed securities and propping up the commercial-paper market.
Treasury officials are increasingly optimistic that even American International Group Inc. could be on its own within a year, with officials discussing ways to extricate the government from its 80% stake in the insurer, according to people familiar with the situation. AIG is on track to repay its loan to the Fed through asset sales that will raise $51 billion.
The discussions come as the Treasury is planning to sell its $32 billion stake in Citigroup Inc. and General Motors Corp. moves toward repaying its $6.7 billion government investment and embarking on an initial public offering this summer. Both companies could be free of government strings sometime this year.
Just a year ago, the Congressional Budget Office and Office of Management and Budget estimated that the overall bailout would cost more than $250 billion. Last month, though, Treasury Secretary Timothy Geithner said the rescues will amount to "less than 1%" of gross domestic product. The $89 billion projection is less than the cost of the savings-and-loan crisis in the 1980s and early 1990s, which totaled as much as 3.2% of GDP.
The Treasury's estimate is dependent on many factors, including the health of the economy and the housing market. Still, the smaller-than-expected price tag reflects the quick stabilization of financial markets, which helped companies to return their taxpayer-funded money—often at a profit—and allowed the government to spend less on some aid programs than originally projected. The government also is earning dividends, interest payments and other rescue-related income, ranging from about 5% annually on $1.5 trillion in Fannie Mae and Freddie Mac debt to $4 billion from the sale of warrants it got to buy shares in TARP recipients.
But the direct costs of the bailout are dwarfed by the broader political and economic impact, many experts say. It likely will take many years for the U.S. to recover from the economic misery, ballooning U.S. debt, lost tax revenue and political tumult fueled by the financial crisis.
"If you look at the cost of a financial crisis ... the bailout costs are often a small part of it," said Kenneth Rogoff, an economics professor at Harvard University and co-author of a 2009 book about financial crises.
For example, the U.S. government still is providing crucial support for financial and housing markets. And there is one glaring exception to the encouraging trend of wards of the state getting back on their feet: Housing giants Fannie Mae and Freddie Mac, with $125.9 billion in direct injections from the government, are expected to rely on federal coffers for years. They have an unlimited U.S. credit line.
According to the CBO, losses related to the investment portfolios of Fannie Mae and Freddie Mac are projected to total $370 billion through 2020, though the figure will fluctuate depending on the health of the housing market. The Treasury's $89 billion estimate for the total bailout cost doesn't incorporate CBO's projected losses at Fannie and Freddie because, for budgeting purposes, the Obama administration technically considers them private entities. Taxpayers are potentially on the hook for losses at Fannie and Freddie.
Widespread anger over the rescues has complicated the Obama administration's ability to get things done in Washington, including its proposed overhaul of financial regulation.
"How do you put a price tag on populist rage that's polluting all economic policy making?" said Anil Kashyap, a University of Chicago economist who has criticized the U.S. government's bailout.
Economists say economic and financial woes subtracted several hundreds of billions of dollars in tax revenue. Corporate and personal income taxes sank, while capital-gains taxes sputtered along with the stock market. U.S. government revenue for 2009 came in at $2.1 trillion, about $200 billion below levels projected by the nonpartisan CBO.
Still, of the $245 billion that Treasury invested in U.S. banks, $169 billion has been returned so far, and officials estimate an eventual profit of $8 billion.
As of February, the U.S. government has collected $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds.
Treasury officials now are discussing the future independence of AIG, even though many people inside and outside the government assumed the insurer would remain under U.S. control for years. AIG is on track to repay $51 billion to the Federal Reserve Bank of New York from sales of two Asian life-insurance units. The New York Fed expects to recoup another $32 billion from securities previously held or insured by AIG that are now sitting on the regional Fed bank's balance sheet.
Officials at the Treasury Department, which owns $48 billion in preferred shares of AIG, are debating the best way to dispose of the government's 80% stake in the insurer, according to people familiar with the discussions. Under one scenario being considered, the U.S. government could convert its stake into common shares that are then sold to other investors. A similar move is under way with Citigroup.
Whether the government makes a profit on its AIG stake will depend largely on the company's share price.