Daniel W. Drezner

There’s gold in them thair bailouts!

Hey, remember last year when there was a lot of populist hostility to the whole bailout idea because it was going to cost the taxpayers a truckload?  It’s funny how things turn out:  The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the ...

Hey, remember last year when there was a lot of populist hostility to the whole bailout idea because it was going to cost the taxpayers a truckload? 

It’s funny how things turn out

The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report.

The new assessment of the $700 billion bailout program, provided by two Treasury officials on Sunday ahead of a report to Congress on Monday, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. That figure anticipated more financial troubles requiring intervention….

[T]he new estimates would lower the administration’s deficit forecast for this fiscal year, which began in October, to about $1.3 trillion, from $1.5 trillion.

If you dig through the numbers, the bulk of the losses come from two sources — the bailouts of GM and Chrysler, and the bailout of AIG. 

This leads to another very interesting irony.  The biggest beneficiary of these bailouts is the American public, since the financial system did not melt down and the futures market for duct tape and shotguns never materialized.   

Another big beneficiary, however, are sovereign wealth funds:

In less than two years, many of the biggest overseas government investment funds, known as sovereign wealth funds, have reaped huge gains from bailing out financial institutions, and in turn, the global financial system.

In the latest announcement, Kuwait’s sovereign wealth fund said on Sunday that it had booked a $1.1 billion profit on the stake it took in Citigroup in January 2008. That equals a 37 percent annualized return on its initial $3 billion investment. Other sovereign wealth funds — including those backed by the governments of Singapore, Qatar and Abu Dhabi — have also recently cashed out stakes in foreign banks for comparably large gains.

The hefty returns highlight how some savvy government funds have been able to profit from the financial crisis, even as most ordinary investors have been pummeled by billions of dollars of losses. It also calls into question whether such funds will act as long-term investors, as many initially suggested, or merely short-term profiteers.

I’m not sure how "savvy" these funds actually were — I don’t think that they were banking on a crisis followed by a rapid recovery in the financial sector.  Still, these funds didn’t panic during the meltdown, so I guess that’s a small point for "patient capital."

That said, I’m wrestling with the lessons to draw from all of this.  It does suggest that with great risk comes great opportunity.  By late 2007 it was governments rather than private capital markets that were willing to take the risk. 

I’ll leave it to the commenters to draw additional lessons. 

 Twitter: @dandrezner

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