APRIL 12, 2010

Light At the End of the Bailout Tunnel

WASHINGTON—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.

Bloomberg News

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.

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