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October 5, 2010 11:49 pm
The US Treasury forecast that the core of the financial rescue would cost $29bn, a fraction of initial estimates, but acknowledged it would lose “substantial” money supporting the mortgage system.
With expiry of new payments from the $700bn troubled asset relief programme last Sunday, senior Obama administration officials have declared the rescue effort a success and the most cost-effective support to the banking system in several decades of crises.
Tim Geithner, US Treasury secretary, wrote to Congress on Tuesday to defend the programme. He noted it was launched as a bipartisan effort and that “many have lost sight of the pressing need for this initiative ... and criticised its successful implementation”.
Tarp alone should cost about $50bn, the Treasury said, down from initial estimates of more than $300bn and the last estimate by the non-partisan Congressional Budget Office of $66bn. Including returns generated from additional Treasury support to AIG, the insurer whose turnround has been quicker than expected, the cost was now pegged at $29bn.
The Treasury released the letter and cost estimate on Tuesday as part of a report on Tarp, which is marking its second anniversary.
With an unemployment rate close to 10 per cent and sluggish growth in the US economy, officials have been reticent in trumpeting the success of Tarp. But the restructuring at AIG and forthcoming sale of shares in General Motors have encouraged them to reject more forcefully the notion that it was a wasteful Wall Street bail-out.
Qualifying the success, the report notes that the government is likely to “incur substantial losses from Fannie Mae and Freddie Mac”, the mortgage guarantors seized in 2008.
But the Treasury argues that the cost will be offset by its own investments in mortgage-backed securities and increased remittances to the government from the Federal Reserve, which also bought large quantities of MBS to boost liquidity.
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