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Taxpayers Earned $25 Billion on Treasury’s Mortgage-Backed Securities Bail-Out

This article was written by in Economy. 5 comments.

At the height of the recession, President George W. Bush and the congress authorized a bail-out of banks and investment companies headed for failure.

In a similar plan to bail out Fannie Mae and Freddie Mac, the government authorized the Treasury moved forward with the plan to stabilize the financial industry, and to an extent the economy. The Treasury purchased $225 billion in mortgage-backed securities insured by Fannie Mae and Freddie Mac.

These securities were considered toxic because investors believed that the underlying mortgages were risky, and the price on the open market did not reflect that risk. When investment banks couldn’t get rid of these bad products on the open market, the Treasury stepped in and paid a discount to acquire the assets. This helped the investment banks pad their balance sheet with more cash, improving their financial conditions, avoiding bankruptcy or failure, alleviating to some degree panic in the market that could have led to a more damaging recession or economic depression.

One year ago, the Treasury began selling these mortgage-backed securities, and as of today, the government no longer has any of the assets purchased under this bailout plan. Not only that, but the Treasury earned $25 billion on its $225 billion investment. That works out to a total return of about 11 percent over about three and a half years (the purchases began in October 2008), though that doesn’t take into account the timing of the buying and selling transactions. The good news is that the Treasury did not lose money on toxic assets, a legitimate concern at the time.

The concern is not over, however. The quality of the underlying mortgages is still in question. The investments could still fail.

… [I]f the mortgages behind those securities fail, taxpayers will still be on the hook, since federal housing giants guarantee the loans and taxpayers have been propping up Fannie Mae and Freddie Mac.

The $25 billion earned through the bail-out of Fannie Mae and Freddie Mac will go to paying down government debt.

Photo: cliff1066

Published or updated March 19, 2012.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 5 comments… read them below or add one }

avatar 1 Anonymous

That will offset those losses from Solyndra! lol

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avatar 2 Anonymous

I’m glad we didn’t lose any money on this deal. I think we lost billions bailing out GM and Chrysler. Maybe this will offset those losses.

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avatar 3 Anonymous

Maybe we had direct losses for the Detroit automaker loans but I would venture to bet that the indirect savings more than outweighted the losses. These were from less unemployment pay-out to former employees of the car companies, suppliers, people who worked at local restaurants and dealers, more income tax revenue from employees who kept their jobs and from the car companies and the suppliers. And there might have been a huge need for federal government assistance to affected states including Michigan which probably would have collapsed.

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avatar 4 qixx

If only all the government investments had this good of a track record. And to think i thought this was a bad idea at the time. One question i do have is how much of a discount did the government get when they picked up the loans? Is the return 11% after accounting for the discounts or might this have been a loss had the government not gotten the discount?

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avatar 5 Anonymous

Good post. It’s very good to see factual information about the various “bailout” programs initiated in 2008-2009 as opposed to rants about how the government wastes taxpayer money (which, yes, it does — an entity of multi-trillion size and you will inevitably waste billions, just like every household and individual wastes hundreds or thousands every year).

TARP, bailouts, ZIRP were not done out on Bernanke’s whim to screw the savers or redistribute wealth. The US and the world were on the brink of Great Depression-like meltdown. Imagine what would happen to your personal finances if all your assets other than cash were suddenly frozen. This was what was happening on global scale. Every business relies on short-term loans to keep operating. These were frozen at the time. Imagine the whole world suddenly stopping. That’s what we were looking at back then. Thinking that the world could stop but you could go on living as you were and earning your 5-6% from CDs and bonds is, well, laughable. We would have been immediately plunged into a repeat of Great Depression or worse. Everyone would be screwed, including the savers. TARP/ZIRP were a small price to pay to avoid that fate. The fact that we will nearly break even on bailouts is just icing on the cake. Preventing that meltdown would’ve easily been worth the full $700 billion. Lost federal tax revenues alone would have been bigger every single year in a true depression.

It’s very sad to see thousands of sites and forums pandering to the populist outrage over the bailouts without giving any consideration to what the alternative was. Yes, in the whole mess there’s no doubt billions were spent wastefully. That’s still miles better than losing trillions that would have resulted from doing nothing at all. So thanks for posting this article.

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