However, the two largest recipients of TARP money – Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) – have yet to pay back their loans and the government is still exposed to possible losses from those two heavyweights, as well as from smaller U.S. banks.

The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

Those financial institutions consist of:

• Goldman Sachs Group Inc. (NYSE: GS) – $1.4 billion in profit.
• Morgan Stanley (NYSE: MS) – $1.3 billion in profit.
• American Express Co. (NYSE: AXP) – $414 million in profit.
• Northern Trust Corp. (NYSE: NTRS), The Bank of New York Mellon Corp. (NYSE: BK),    State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – $100 million to $334 million in profit.
• Fourteen smaller banks that have repaid their debt – $35 million in profit.

JPMorgan Chase & Co. (NYSE: JPM) and Capital One Financial Corp. (NYSE: COF) could yield an additional profit of more than $3.1 billion in the coming month, but the final number is dependent on how much they will pay to buy back their warrants, The Times said.

Additionally, the U.S. Federal Reserve earned $16.4 billion through the first six months of the year, thanks to a range of rescue programs – including loans to investment banks and purchases of mortgage-backed securities – while the Federal Deposit Insurance Corp. (FDIC) saw a profit of more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. Still, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets, and expects to eventually have to cover $14 billion in future losses on deals cut so far, according to The Wall Street Journal.

“Taxpayers should heave a sigh of relief that the investment in banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the New York University’s Stern School of Business.

The government said last year that its decision to purchase preferred shares from hundreds of banks ravaged by mortgage defaults would yield a positive return, including a 5% quarterly dividend and warrants to buy stock in the banks at a set price over 10 years.

As many banks stanched their losses and began to turn a profit, the government authorized them to buy back the preferred stock, make the dividend payments for each quarter since October. Banks also were permitted to buy back the warrants, which had a low fixed price – and which provided therefore provided a windfall for the government as the markets rallied.

The U.S. should consider imposing an automatic ban on dividend payments by lenders when “the bank stock price plummets and the banks aren’t doing well,” New York Federal Reserve Chairman William Dudley told CNBC, expressing concern over how the payouts could end up dissipating the banks’ capital.

Should a bank lose capital because of a falling stock price, it could raise more capital by issuing debt that is convertible, Dudley said.

Had private investors taken matching stakes in the banks in October, they would have tripled their investment to roughly $12 billion, or 44% on an annual basis, according to University of Louisiana at Lafayette finance professor Linus Wilson, who analyzed the data for The Times. But there’s a good reason for that. Under this hypothetical scenario, the private investors would have demanded a higher rate of return, bought in at a lower price, or both – because of the high risk that they would have been incurring.

But the government wasn’t in this to make a profit – it was working to stabilize a financial system that was quickly losing the public’s confidence, experts note.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions, told The Times.

Threat Posed by Loss-Shares

Despite the encouraging news that taxpayers are getting strong returns on their reluctant investments, the loan guarantees invested in the two largest TARP recipients – Citigroup and Bank of America – have not yet been repaid. Citi received $50 billion in TARP funds, while BofA got $45 billion.

In the last month, Citigroup has seen its stock surge roughly 58%, along with a 19% return in the shares of BofA, which leaves the U.S. government sitting on a combined $18 billion of profits from the warrants it purchased last year.

Those banks also hold troubled mortgages and other loans that no one can put a value on – which is why these so-called “toxic assets” have yet to attract buyers.

“No one has a good handle how much is out there,” Elizabeth Warren, the chairman of the Congressional Oversight Panel who acts as the so-called “TARP watchdog,” told Reuters Television in an interview last month. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”

More than 50 deals brokered by the FDIC to absorb losses at small banks affected by the financial crisis still remain in place. These agreements to assume the risk of loans and other assets from the consolidation of failed banks are known as “loss-shares,” and are an important inducement for healthy banks to take over busted institutions.

The FDIC brokered the sale of Alabama’s Colonial BancGroup Inc.’s (OTC: CBCGQ) deposits to BB&T after Colonial failed. It also agreed to help BB&T buy Colonial’s $15 billion portfolio of loans and other assets and absorb over 80% of any future losses. Under the deal, BB&T’s losses are capped at $500 million and – in the unlikely event the entire portfolio becomes worthless – the FDIC is on the hook to cover the rest.

The FDIC sees these deals as a way to keep loans and other assets in the private sector, as well as mitigate the cost of cleaning up the industry.

It would cost the FDIC considerably more to simply liquidate the assets of failed banks, especially with more than 400 banks on its “problem list.” Loss-share deals will cost $11 billion less than if the agency seized assets and sold them, The Journal said, citing the FDIC.

So far this year, 109 banks have failed – quadruple the amount of failures in 2008. The FDIC’s recouping any lost money from the loss-share deals, many of which are in place for up to 10 years, is dependent on the recovery of the economy

Some worry that bankers may tire of the partnerships with the FDIC and not work toward fixing bad loans because the bulk of the losses will fall to the government. But agency officials maintain that because banks still have a “material” exposure, they will be reluctant to do this.

“There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government,” former FDIC general counsel John Douglas told The Journal.

A typical deal has the FDIC agreeing to cover 80% of future losses on a big portion of the assets, and 95% on the rest. However, the FDIC does not expect to see the 95% scenario play out on any of the deals it has made so far.

Source: U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands

That drop-off from the fourth quarter to the first quarter in the OFHEO’s “purchase-only index” exceeded the 1.4% decline between the third and fourth quarters of last year, and was the biggest decrease in the 17-year history of the index. On a year-over-year basis, home prices have fallen 3.1% since the first quarter of 2007.

All the figures were reported on a seasonally adjusted basis.

“For homeowners and financial market observers, these declines spell further erosion in home equity levels and potentially more trouble for mortgage markets,” James Lockhart, OFHEO’s director, said in a statement.

However, Lockhart also noted that the decline in prices could be good news for some.

“To prospective home buyers who have been shut out of homeownership because of affordability constraints, these declines may be welcome news,” he added.

The size of the first-quarter decline is yet another signal that the housing recession is still weighing heavily on the home market.

The steepest declines were in areas that experienced overbuilding, such as California and Nevada, where home prices dropped as much as 8% in the quarter, the OFHEO reported.

The drop in housing prices only serves to exacerbate the ongoing subprime crisis.

“It’s a dismal picture, there’s no way around it,” Paul Kasriel, chief economist at Northern Trust Corp. (NTRS) in Chicago, told Bloomberg News. “A complicating factor is the fact that so many homeowners owe more on their mortgages than their houses are worth. This is a financial crisis. You can’t put lipstick on this pig.”

As home prices drop, overextended owners are unable to sell for a price high enough to cover the outstanding balance on their mortgages. The result has been a large upswing in the number of home foreclosures.

Foreclosure filings have hit an all-time high, with a 65% year-over-year increase in April and a 4% increase from March, RealtyTrac reported earlier this month.

Almost two-thirds of U.S. banks have raised standards for mortgages, even to their most creditworthy borrowers, Bloomberg reported. For those with limited or bad credit history, so-called subprime borrowers, three-fourths of banks have raised lending requirements, according to a U.S. Federal Reserve survey of senior loan officers published May 5.

At the same time that consumers are finding it hard to obtain needed financing, the high level of housing inventory, currently at an 11-month supply, is making it very difficult for distressed homeowners to sell. The glut of homes currently on the market is putting downward pressure on home prices.

“The large overhang of real estate inventory awaiting sale continues to force price declines in many areas, but particularly in places that had seen very sharp appreciation in previous periods,” said Patrick Lawler, OFHEO chief economist.

Source: U.S. Housing Prices Suffer Worst Quarterly Decline on Record