TARP watchdog: Full repayment ‘unlikely’

The auto industry, AIG and other struggling recipients of the government’s $700 billion Wall Street bailout will make it “extremely unlikely” that taxpayers will receive a full return on their investments, says a new report by the Treasury Department’s independent watchdog.

About 17 percent of Troubled Asset Relief Program (TARP) loans issued since the program began a year ago have been repaid, according to a 252-page report released Wednesdayby TARP’s Special Inspector General Neil Barofsky.

But with a handful of major bailout recipients battling for survival, such as General Motors, Chrysler and insurer American International Group (AIG), “full recovery is far from certain,” says the study, which examines the Treasury’s handling of TARP for the third quarter of 2009.

GM and Chrysler, along with their financing arms, collectively received about $80 billion in TARP funds to “avoid a disorderly bankruptcy of one or more auto companies.”

While both automakers have emerged from bankruptcy, the report casts significant doubt the companies will be able to repay their TARP loans in full.

Treasury so far received about $465 million in dividends and approximately $206 million in interest payments on the bulk of its TARP investment with the automakers - the $77 billion Automotive Industry Financing Program (AIFP), the report says. Chrysler Financial has paid back $1.5 billion in AIFP funds.

AIG, which has received about $180 billion in TARP funds, is slowly returning to financial stability, according to the report. The company posted a profit for the second quarter of this year for the first time since 2007.

But AIG has missed three TARP dividend payments to Treasury as of Sept. 30. If the company misses a fourth payment Nov. 1, Treasury will have the right to elect directors to the AIG board.

Mr. Barofsky’s office, in another report this month, sharply accused the Treasury Department of failing to adequately investigate a massive and complex employee bonus program at AIG last year before awarding the company TARP money.

Another TARP recipient, a government-run mortgage assistance program called Making Home Affordable, isn’t designed to yield a return, the report says. The program is scheduled to use up to $50 billion of TARP funds.

The report accuses the Treasury and the Federal Reserve of relying too much on rating agencies. Instead, it recommends the regulators use alternative underwriting analysis such as security-by-security screening of the asset-backed securities posted as collateral by TARP recipients for their loans.

The study also recommends that Treasury ease up on its push to streamline the application process within the Home Affordable Modification Program run by the mortgage finance giant and bailout recipient Freddie Mac.

TARP consists of 12 announced programs - 10 of which have been implemented. Treasury, as of Sept. 30, had announced commitments to spend $636.9 billion of the $699 billion maximum available for the purchase of troubled assets under TARP as authorized by Congress.

So far about $454.3 billion in TARP money had been expended through the 10 implemented programs to provide support to financial institutions and markets, the automobile industry and homeowners, Mr. Barofsky’s office says.

As of the end of September, 47 TARP recipients have paid back all or a portion of their loans for a total of about $73 billion. That leaves $317 billion, or about 45 percent, of TARP money available for distribution.