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Uncle Sam's Big Bailout Win: A $25 Billion Profit for Taxpayers

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Uncle samWhen Congress announced in 2008 that it would be lending $700 billion in taxpayer money to bail out some of America's biggest (and most careless) banks, a lot of people thought this was a really bad idea.

But whether or not you think the billions invested in saving the likes of Citigroup (C), J.P. Morgan Chase (JPM), AIG (AIG), and General Motors (GM) was worth the cost, the companies were saved. And as we learned this week, at least one of Uncle Sam's bailout investments actually turned a profit.

Returns That Even Warren Buffett Would Love

As part of the Housing and Recovery Act of 2008 ("HARP" -- a cousin to "TARP"), the government in 2008 embarked on a project to inject "liquidity" into the housing market. Treasury spent a total of $225 billion buying mortgage-backed securities from Fannie and Freddie in 2008 and 2009.

Then, last year, Treasury began selling back to private investors the toxic mortgage-backed securities it acquired while bailing out Fannie Mae and Freddie Mac.

Between interest collected on these securities while they were in government ownership, and proceeds from their sale back into the market, Treasury says it has netted $250 billion total -- for a whopping $25 billion profit.

Pretty savvy, huh? Well, sort of.

How'd They Do That?

While we can all be thankful that the government sidestepped a loss on HARP, its performance isn't quite as astoundingly good as the administration would like you to believe. Consider:

1. It took the Treasury about 16 months to "earn" its $25 billion profit. On a $225 billion initial investment, that works out to about an 11% total return, or about 8.3% per annum. While a profit is better than a loss, most investors know that this is actually subpar for returns on the stock market.

2. The $225 billion that Treasury "spent" to "buy" these securities wasn't even real money. Not in the sense of the way ordinary people invest, at least. Think about it. Before you buy a stock, you have to first earn a paycheck, deposit the paycheck, then withdraw some of your savings and invest them in a stock, right?

But what did Treasury do? It skipped past all the boring stuff -- work, savings, investment. Treasury basically just turned on the (virtual) printing presses, created some money, and spent it. It went directly to "GO," collecting $200 (or rather, $225 billion) en route.

3. It had all the time in the world to let the investment pay off. Unlike the banks and companies it saved, and unlike you and me, Treasury is part of the federal government -- an institution with at least a two-century lifespan (and hopefully a bit more). Longer-lived than most investors, Treasury had the ability to buy Fannie's and Freddie's distressed assets and then wait as long as necessary for these assets to regain some value.

It was only 16 months, as it turned out. But if need be, Treasury could very well have sat on its toxic nest egg for years, or decades, waiting for profits to hatch.

If Only We Were All So Lucky

So here's the upshot: Yes, Treasury made a profit on the mortgage-backed securities that it acquired from Fannie Mae and Freddie Mac. Since it saved us all from taking a loss, bully for it -- but don't get too carried away with the applause.

Unlike ordinary investors, the Treasury had unlimited access to funds, unlimited ability to withstand losses without suffering a margin call, and unlimited patience to wait for its "investment" to bear fruit.

If you had all that at your disposal, you could earn $25 billion, too.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Citigroup and J.P. Morgan Chase.

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bcrnbs2

AHHH H ELL PEOPLE
SUCK IT UP.. ITS ONLY YOUR TAX DOLLARS.. WELL LET ME REFRASE THAT.
IT YOUR KIDS TAX DOLLARS 50 YEARS IN THE FUTURE THEY WILL BE PAYING
ON. OUR GOVERNMENT IS WRITEING CHECKS ON OUR FUTURE AND THEY
DONT GIVE A DAMN BECAUSE WHEN THE ACCOUNT COMES DUE, YOU KIDS WILL
BE EXPECTED TO PAY IT...

March 26 2012 at 4:44 AM Report abuse +2 rate up rate down Reply
bcrnbs2

LOL
YOU THINK THATS BAD,, I KEEP GETTING THESE EMAIL S FROM THE DEMOCRATIC PARTY TELLING
ME HOW OBAMA HEALTH CARE HAS SAVED THOUSANDS OF PEOPLE.... I KEEP EMAILING BACK
HOW DO I GET SOME OF THAT OBAMA HEALTH CARE YOUR TALKING ABOUT..
AND I NEVER GET AN ANSWERE... AND I AM A GOOD LIBERAL... SO WHY AM I GETTING
SCREWED BY MY OWN PEOPLE....

March 26 2012 at 4:40 AM Report abuse +2 rate up rate down Reply
bcrnbs2

WOW SEVEN HUNDRED BILLION WAS LOANED.. AND NOW FIVE YEARS LATER WE
GET BACK 25 BILLION.... AND THATS A WINFALL.... HELL PEOPLE WE ARE STILL
SIX HUNDER AND SEVENTY FIVE BILLION IN THE HOLE....

THEIR IS NO WAY WE CAN EVER GET IT ALL BACK... WE MIGHT AS WELL WRITE IT OFF
AND FOR GET IT...

March 26 2012 at 4:37 AM Report abuse +1 rate up rate down Reply
bassiman

25 billion is still better than a sharp stick in the eye! More importantly, it stabilized the financial markets. Obama 2012!

March 26 2012 at 12:28 AM Report abuse -2 rate up rate down Reply
2 replies to bassiman's comment
chvemn

You dont get it do you? printed money out of thin air,which lowers the value of the dollar and we the tax payer pays interest on that money printed out of thin air to the federal reserve(private bank) which is owned by the same banks that got the bailout, they loaned themselves money and made interest on it.

Stabilized the financial market?(you watch to much MSM propaganda) they only kicked the can down the road by subsidizing the stock market with QE1, QE2 and QE3(flooding the market with more freshly printed money out of thin air). the mechanism which created the crash is still in affect "crony capitalism". and 0bama is bought off just like bush was, they are just puppets to their corporate masters. Time to wake up and take off the blinders.

March 26 2012 at 1:38 AM Report abuse +2 rate up rate down Reply
bcrnbs2

LOL
STABILIZED WHAT FINANCIAL MARKET.... OBAMA CAMPAIGN FUND FOR REELECTION IN 2012..
25 BILLION IS NOTHING COMPARED TO THE 700 BILLION LOANED OUT...
OBAMA 2012, WHY WOULD YOU WANT ANOTHER MUSLIM DICTATOR FOR ANOTHER
4 YEARS...

March 26 2012 at 4:46 AM Report abuse +3 rate up rate down Reply
1 reply to bcrnbs2's comment
taerodmoon

quelle penoid

March 26 2012 at 8:48 AM Report abuse rate up rate down
Setanta

does anyone know and can provide a link stating WHAT PERCENTAGE of loans are underwater and WHAT PERCENTAGE ARE PAYING,BEEN PAYING,etc ?
why doesn't the lamestream or ANYONE provide this info ?

March 25 2012 at 11:55 PM Report abuse rate up rate down Reply
1 reply to Setanta's comment
jdykbpl45

Obama and Bernake do not want you to know. Neither does Huff Puff.

March 26 2012 at 9:41 AM Report abuse +2 rate up rate down Reply
george

This is all a bunch of buffalo chips. I'm guessing the only worth in this whole episode is the money skimmed off by a union somewhere, Obama's campaign fund, various and sundry highly placed bank officials and possibly some other union, and certainly more to Obama's campaign account.

March 25 2012 at 9:25 PM Report abuse +2 rate up rate down Reply
ntr721

IT will be interesting to see how Romney and Rove spin this so that it was all due to GW Bush.

March 25 2012 at 8:46 PM Report abuse +1 rate up rate down Reply
dhsdome

When is Obama going to mail out our checks for our share of the profit?

March 25 2012 at 8:28 PM Report abuse +5 rate up rate down Reply
azharleymanr

The banks pay next to nothing on interest because of the Govt.,
So figure out who got the raw end,

March 25 2012 at 8:23 PM Report abuse +4 rate up rate down Reply
T Salem

yes the US government is making a profit. If you believe that , then you are to stupid to live.

March 25 2012 at 7:56 PM Report abuse rate up rate down Reply
1 reply to T Salem's comment
Setanta

YOU MEAN THAT obummer ain't gonna pay my mortgage and put gas in my car ? !!!!!!!!!!!!
OMG !!!!!!!!!!!!!!!!!

March 25 2012 at 8:13 PM Report abuse +3 rate up rate down Reply
1 reply to Setanta's comment
Setanta

http://www.youtube.com/watch?v=Bg98BvqUvCc&feature=results_video&playnext=1&list=PL50A22FD3353F4D44

March 25 2012 at 8:20 PM Report abuse +2 rate up rate down