Watchdog: Taxpayers Likely to See Profit From Govt. Bank Help

Nov. 6, 2009 — -- Federal government guarantees to back up bank assets during the financial crisis posed a "considerable risk to taxpayers" last year, but the guarantees ultimately played "a significant role" in calming the markets, and now taxpayers appear set to earn a profit, a government watchdog panel said Friday.

In a new report released Friday, the Congressional Oversight Panel said that at its peak the federal government – through the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation – was guaranteeing $4.3 trillion in face value of bank assets, making it the single largest part of the government's response to the crisis.

While the total taxpayer exposure was never $4.3 trillion, the panel warned that these guarantees posed "considerable risk to taxpayers.

"If the guaranteed assets had radically declined in value," the watchdog cautioned, "taxpayers could have suffered enormous losses."

But now, said the panel, it appears likely that the government will rake in more revenue in fees from the guarantees than will ultimately be paid out.

Ultimately, the panel said, taxpayers "appear likely to earn a profit from fees assuming economic conditions do not deteriorate further."

When Congress authorized the $700 billion financial bailout plan last fall, it also gave government agencies the power to support the value of assets indirectly by issuing guarantees.

A guarantee is essentially a promise by one party to back another party's obligation to a third party. It is similar to what the FDIC does by backing up bank deposits up to $250,000. If a bank fails and depositors cannot obtain their money, the FDIC, having guaranteed that debt, will step in and provide the funds.