The U.S. Treasury said on Friday that its $700 billion Troubled Asset Relief Program (TARP) to rescue the nation’s financial industry would cost less than anticipated. The treasury now projects the TARP costs to be $105.4 billion, down $11.4 billion from its previous expectation in February 2010.
 
The improvement in the projected TARP cost was primarily backed by the rise in value of the government’s stake in Citigroup (C), decline in TARP losses related to American International Group, Inc. (AIG), increase in values of some major investments in top Auto makers and greater than anticipated TARP loan repayment.
 
The Treasury currently holds 7.7 billion shares of Citigroup. As of March 31, 2010, the per share market value of Citigroup was $4.05 each, up 80 cents from the price at which Treasury converted Citi’s preferred stock into common equity.
 
The estimated cost for AIG was down by $2.9 billion. The government is expected to exit its holdings in AIG in the near term. Also, AIG is in the process of disposing unnecessary businesses and planning to raise funds through earnings from business operations to repay the TARP loan to the government.
 
The estimated value of the nation’s Automotive Industry Financing Program investments had also increased as a result of the improved outlook for the U.S. auto industry. Investment in US automaker General Motor (MTLQQ) and Chrysler gained 61% and 10% higher value, respectively.
 
Most importantly, the treasury has experienced higher-than-expected TARP repayments. About $190 billion of TARP fund has already been repaid by major institutions.
 
Out of the $247 billion given to the banks, more than half has come back from the healthy banks who have repaid their TARP funds in full. Banks have also paid about $11 billion in interest and dividends. Also, taxpayers have received decent returns on many of their financial-sector investments. Repayments under the TARP have generated a 17% annualized return from stock-warrant repurchases and $12 billion in dividend payments from dozens of banks.
 
The decrease in TARP costs and increasing repayments of bailout money can be viewed as signs of economic recovery. However, the overall economy is not yet out of the woods as we continue to see tumbling home prices, soaring loan defaults and a high unemployment rate. These problems need to be addressed by the government before shifting the strategy to growth.
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