President Bush, Barack Obama and other leaders from both major political parties have made recouping taxpayer dollars a key selling point for the $700 billion economic-rescue package, but the president’s budget office says it doesn’t think the plan will turn a profit.
A senior official at the White House Office of Management and Budget said in an interview that it is unlikely that all of the assets purchased by the government will result in positive earnings.
“You have to make a lot of assumptions in order to conclude that we’re going to make a profit on these purchases,” said the official, who requested anonymity. “There will be some purchases where we profit, but we’re not predicting that the program as a whole would be [profitable].”
When Mr. Bush announced the rescue plan Sept. 19, he said, “We expect that this money will eventually be paid back.”
Since then, however, the president has been more cautious, specifying that “much, if not all,” of the $700 billion will be regained.
Mr. Obama, the Democratic presidential candidate, has gone further than Mr. Bush in suggesting a gain for the taxpayer.
“If this is managed correctly - and that’s an important ’if’ - we will hopefully get most or all of our money back, and possibly even turn a profit on the government’s intervention, every penny of which will go directly back to the American people,” Mr. Obama said Oct. 1, the day the Senate passed the legislation.
Republican presidential candidate Sen. John McCain has said little publicly about regaining taxpayer dollars and calls the plan a risky investment, a campaign official said.
“He is more bridled in his willingness to make an optimistic promise to voters that they’re going to see a dollar-for-dollar return on this rescue plan,” said the campaign official, who spoke anonymously to allow greater frankness. “John McCain’s been optimistic and hopeful, but [he’s] certainly not gone to the lengths of assuring taxpayers or voters with any kind of promise.
“He recognizes the reality that an investment in a loan like this comes with some degree of risk.”
Congressional leaders from both parties have echoed Mr. Bush’s and Mr. Obama’s assertions.
White House deputy press secretary Tony Fratto and an OMB spokeswoman rejected the suggestion that the senior OMB official was contradicting Mr. Bush.
“We haven’t made big claims about ’making money,’ but recouping ’much if not all’ is reasonable,” Mr. Fratto said. “Will there be some assets we could lose money on? Probably, but overall, it’s reasonable to expect the program will recoup the investment.”
Jim Rickards, who worked at a hedge fund that was part of a financial collapse in the late 1990s, said he found the rhetoric from Mr. Bush, Mr. Obama and the others “a little dishonest.”
“We might get half our money back by 2015,” said Mr. Rickards, who now heads an information-technology firm. “That’s not what … people were led to believe.”
Mr. Obama has promised that if elected president, he will “levy a fee on financial institutions” if the government falls short.
In fact, this is in line with the final legislation enacted by Congress, which included a “recoup provision.”
“If the plan hasn’t made taxpayers money or broken even after five years, the president will send a proposal to Congress on how to recover the funds invested by the Treasury Department,” said Nick Simpson, a spokesman for House Minority Whip Roy Blunt, Missouri Republican.
The rescue package passed and signed into law early this month authorizes the Treasury Department to buy up bad debts from struggling financial institutions. Most of the assets are expected to be mortgage-backed securities, but the legislation gives the Treasury secretary wide latitude to purchase almost any kind of debt.
In the last few days, Treasury Secretary Henry Paulson has signaled that he will also likely follow Britain’s example of injecting government money directly into banks. On Monday evening, press reports indicated that he would use $250 billion in this way.
The short-term goal of the Troubled Asset Relief Program, known as TARP, is to allow institutions to regain their financial footing. Over the long term, the government hopes that the assets it purchases will rise in value as the economy stabilizes.
Economists and financial analysts were split on whether that idea is likely to work.
“The president is almost surely too optimistic that the government will recoup most of the $700 billion. Banks will have an incentive to offload their worst paper on the government. The government, in turn, is not a very good asset manager,” said William A. Niskanen, a senior economist at the Cato Institute.
Richard Sylla, an economics professor at New York University’s Stern School of Business, said the success depends on the price at which the government buys the assets and how long it holds them.
“If the program gets the financial system back to normal operation and the economy starts growing at 3 to 5 percent again, the government will also benefit from higher income tax collections, so there are indirect effects of the program as well as the possible direct gain from investing in the assets,” he said.
OMB will release its first formal report on Treasury’s purchases in December.
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