Portfolio Update

Proponents of the various Wall Street bailout schemes often make the point that the American government is not just giving all the money away. Rather, the Treasury is buying stuff with the billions of dollars it disburses. American taxpayers now own mortgage backed securities, common stock, preferred shares and many other financial instruments. In order to help quell opposition to the bailouts, many of our Congressional leaders insisted that we might actually be able to make some money on such investments.

Last September, for instance, Nancy Pelosi insisted that the $700 billion dollar T.A.R.P. "investment" would "protect taxpayers" and provide "upside" (Pelosi Clip). Representative James Moran of Virginia went even further, explaining that "this is the time to be buying, when everyone else wants to sell." He also proclaimed that "the taxpayer is likely to recoup a 25 - 30% capital gain." (Moran Clip, starting around minute 33). I figured it was time for a portfolio update.

The news is not good. Let's start with our investment in Citigroup. Back in October, we paid $25 billion for preferred shares in Citi. A few days ago, the U.S. Treasury converted our preferred shares into just over 7.69 million shares of common stock. As of the market close on March 3, those shares are worth less than $9.5 billion. So we are down over 60% on that trade.

The Treasury owns billions of preferred shares in other financial firms. This investment has not fared well either. Obtaining precise numbers is difficult because the shares we own do not trade in the open market. But calculating a rough estimate is straightforward: The S&P Preferred Stock Index Fund is down over 30% since mid October, when the government began purchasing shares. And we know that the government paid an above market price for its shares. So, we probably lost over 30% on our preferred equity stakes.

I do not know how to go about valuing America's $163 billion investment in A.I.G. Despite receiving such a large cash infusion, the firm continues to deteriorate. A near total loss of our investment should not be ruled out.

In sum, our investment portfolio has done very poorly. Many supporters of the bailout used assurances that taxpayers would be protected and that they could expect substantial gains to help get the $700 billion T.A.R.P. through Congress. Thus far, the government has suffered losses upwards of 30% on its portfolio.