Volume 12: 2nd Quarter 2010
Good News You May Have Missed
It’s Not All Doom and Gloom
TARP is Shrinking
In the darkest days of the global financial crisis, the U.S. Government funded the Troubled Asset Relief Program. By providing troubled financial companies with survival capital, the TARP was designed to help stabilize our rapidly degrading economy.
Of course, not everyone agreed on the necessity or advisability of such a program, or its $700 billion price tag. News outlets covered the controversy over the TARP program virtually 24 hours a day.
However, the second half of this saga has not been nearly so well covered. Given that TARP funds were structured as loans and not equity investments into participating companies, the government stands to recoup a significant portion of its money. As of March 31, 2010, much headway has been made:
- Before buying its way out of TARP, Goldman Sachs delivered a return of more than 20% annualized to the federal government.
- American Express delivered a return of more than 35%.
- In the period from October 2008 thru March of 2010, the government has earned an annualized return of 8% on the entire TARP fund.
The real headline to this story is not the return on the individual TARP investments but the fact that the overall cost of this program to the U.S. taxpayer is shrinking. Paybacks, coupled with interest from investment, are chipping away at the price tag. According to an article in the April 12, 2010 Wall Street Journal, the end cost of the TARP may be as low as $89 billion. That’s not peanuts…but it’s a far cry from the original $700 billion price tag, and is in fact about 42% less than the taxpayers’ cost of the Savings and loan crisis of the 1980s. (Source: Reuters).
Of course, not everything in the “bailout” is included in this figure. Fannie Mae and Freddie Mac still have an unlimited credit line with the federal government. Given present market conditions, the price tag for keeping these two organizations afloat may exceed $350 billion over the next decade. But that number, too, may decline drastically if and when the real estate market stabilizes.
Healthcare Reform and U.S. Corporations: Suffer Now, Benefit Later
If you listen to corporate earnings reports, you may have noticed that big name companies such as AT&T, Caterpillar, and Verizon have all come out with massive “healthcare charges” on their recent earnings reports. If you didn’t do any further investigation, it might seem as if the new Health Care Reform bill was increasing the cost of healthcare these companies provide, hurting their bottom line.
We believe that’s a bit of an illusion. Under the 2003 Medicare Part D bill, these large companies received a 28% subsidy for the cost of their payments to retirees with drug plans. A further provision allowed those companies to deduct the full amount of the cost of their drug retiree drug plan, despite the subsidy.
The Healthcare Reform bill eliminates this loophole. Companies must now write off only the 72% of the cost of their retiree drug plan for which they are actually paying. Yes, that change in tax treatment stings now. But, according to the nonpartisan Congressional Budget Office, this one-time charge should be far overshadowed by the ongoing benefit of paying an estimated 3% per year less per employee in healthcare premiums.
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