TARP Watchdog Sees Possible Profits From Guarantee Programs

The U.S. government is likely to make a profit on trillions of dollars in guarantees made during the height of the financial crisis, though such arrangements do expose taxpayers to significant risk, a watchdog said Friday.

The Congressional Oversight Panel for the Treasury Department's $700 billion Troubled Asset Relief Program said in a report that at its zenith, the government was guaranteeing or insuring $4.3 trillion in financial assets in three programs run by the Treasury, Federal Reserve and Federal Deposit Insurance Corp.

Through these programs, the report said, "taxpayers bore a significant amount of risk," but it may have been worth it: the panel found that it is likely the government will receive more in fees and other revenue than will be paid out through the guarantees. As of the report's release date, the government had collected $17.4 billion in fees from the guarantee programs, while only as much as $2 million was expected to be paid out to cover a default.

"The panel has noted a trend towards a more aggressive and commercial stance on the part of Treasury in safeguarding the taxpayers' money," the report said.

Still, such guarantees do raise issues for the government, including the potential for distorting financial markets because of participants' belief that such guarantees will always be in place.

"As Treasury contemplates an exit strategy ... unwinding the implicit guarantee of government support is critical to ensuring an efficiently functioning marketplace," the report said.

Rep. Jeb Hensarling (R., Tex.), said in a statement released by his office that the success of the government's guarantee programs may not be indicative of future performance.

"One of the most regrettable legacies of TARP is that the all-but-explicit government guarantee of financial institutions ... has severed the link between risk and responsibility," Hensarling said.

The report even suggested that federal guarantees on $300 billion in Citigroup Inc. (C) assets could result in a profit for taxpayers. Though the panel pushed Treasury to be more transparent about guarantee programs, including detailed analysis of the Citigroup asset pools, investigators found no significant flaws in the implementation of the government guarantees.

-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com