The $700 billion Troubled Asset Relief Program (TARP), which former Treasury Secretary Hank Paulson set up in October 2008 to buy financial toxic waste, has made the U.S. a $4 billion profit on $240 billion that it invested in hundreds of banks. Never mind that TARP has not purchased any toxic waste. The TARP's yield so far is about 15 percent annualized -- roughly triple the five percent expected last October.

The source of these profits has mostly been so-called warrants, which are essentially options to purchase common shares at a low, predetermined price. Since that price is much lower than the banks' current market prices, the U.S. has been able to negotiate much higher prices for the warrants from the banks that took TARP money.

That's because as the market price of bank stocks has risen -- some are up five-fold from their lows -- those banks have been eager to limit the government's gains -- and their own potential losses -- by buying back the warrants. Some of the profits earned so far include $1.4 billion from warrants sold to Goldman Sachs (GS), $1.3 billion on Morgan Stanley (MS) and $414 million on American Express (AXP).

The five other banks that repaid the government -- Northern Trust (NTRS), Bank of New York Mellon (BK), State Street (STT), U.S. Bancorp (USB) and BB&T (BBT) -- each generated profit for the U.S. ranging between $100 million and $334 million.

And this does not include the mixed blessing of U.S. stakes in Citigroup (C) and Bank of America (BAC), which hold tens of billions in toxic waste yet whose stock prices have soared over the last year. These banks are in no financial condition to pay back their loans yet the U.S. is sitting on a profit of $18 billion in these two stocks alone.

It looks to me like the TARP was a great idea -- but not for its original purpose of buying toxic waste, which has proven to be a non-starter. The point of TARP was to keep the banking industry from collapsing, which it was on the verge of doing back then.

And whether the U.S. ultimately nets $10 billion or $100 billion in profit from TARP, the most important objective -- to keep the financial system together -- appears to me to be TARP's ultimate payoff. While it is certainly too early to conclude that the problem is solved, there is no doubt that we are better off now than we were last October.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He owns Citi shares and has no financial interest in the other securities mentioned.


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