Could the Economic Bailout Turn a Profit?

Yesterday I wrote that early returns from banks paying back TARP money suggests the Troubled Asset Relief Program designed to provide emergency funds to banks during the crisis could make a profit. I cautioned that we shouldn't be so optimistic about the profitability of all our bailouts, which included Fannie/Freddie, AIG and the auto industry.

But today (via Curious Capitalist) I find an argument for why we should expect the Fannie/Freddie rescue to pay back its funds -- and then some! -- in the next four years.



Here's John Hempton:

Pre-tax, pre-provision operating profits of Freddie Mac are running at over $15 billion. If the government were not demanding 10 percent on its preference shares the companies would be sufficiently well capitalised to repay their interest in 4 years. With the drag of having to pay the government $5 billion per annum it will take a bit over five years. Either way the operating profits of Freddie Mac are big enough to ensure the government gets its money back. If you do the same analysis for Fannie Mae its is even better. ... The consensus view that the GSEs are forever toast - and forever a drain on the US Government is very likely wrong.

In the ensuring analysis, Justin Fox concedes that the profitability of the bailout shouldn't conceal the fact that Fannie and Freddie are bizarre public-private hybrid-beasts that probably should never have existed in their pre-crisis mode to begin with.

...they are problematic organizations that probably shouldn't be allowed to continue to exist in their pre-2008 form. And reforming them will be much harder once they've paid back all the money taxpayers have advanced them. But reforming them before they've paid back all the money may make it impossible for them to pay back all the money.

This hit on a central irony of the bank bailouts. In the depts of the crisis, we had two goals. The first was to make the banks stable. The second was to use the crisis to reform them. But the success of the second goal is predicated on the delayed success of the first goal: The healthier our financial system gets, the less political will Obama will find to reform it. Financial institutions, it turns out, are kind of like hard metals. You can't bend them very well unless they're practically melting.