Where bailout money goes to die

By U.S. News & World Report

When CIT Group (CIT, news, msgs), a medium-sized lender, faced the threat of bankruptcy recently, it raised an uncomfortable prospect for the officials in Washington managing the financial system bailout.

CIT got $2.3 billion in bailout funds last year -- yet it was still failing. And the government decided not to offer any more help. So if CIT declared bankruptcy, taxpayers would be out their $2.3 billion.

CIT has averted bankruptcy, for now, but its brush with insolvency highlighted one of the biggest risks of the entire bailout scheme: that taxpayers won't get their money back.

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That problem has been overshadowed recently by some good news from firms like Goldman Sachs (GS, news, msgs) and JPMorgan Chase (JPM, news, msgs), which have paid back loans they got under the government's Troubled Asset Relief Program. So far, 34 companies have returned about $72 billion in TARP funds to the government, according to a bailout tracker maintained by journalism site ProPublica.

But nearly 700 firms have received bailout money, and many of them are still in rough shape.

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To gauge how much bailout money may be at risk, we asked the Ethisphere Institute, a private research group that studies corporate responsibility, to identify who the biggest TARP-jumpers are likely to be. Ethisphere publishes a TARP Index Report, updated weekly, that measures the financial performance of all TARP recipients and calculates the "return" to taxpayers if the bailout funds are treated as an investment in the companies that got them.

By that measure, the government has been a poor investor, losing about $148 billion so far -- $1,233 per U.S. household. Ethisphere analyzed the same data, including results from the Federal Reserve's recent stress tests, to identify companies most likely to write off their debts to the federal government, either partly or completely.

Bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have argued that the government is likely to get most of the bailout money back, which would make it more like an interest-bearing loan than a giveaway. But since the bailouts began last fall, a number of developments have made it clear that the feds -- and the taxpayers -- can kiss some of that money goodbye.

Ethisphere estimates that the following nine companies could end up costing the government the most when the final bailout accounts are tallied. Together, they account for nearly $220 billion in government bailouts, including TARP money and other funds.

AIG (total bailout received: $85 billion). It's hard to imagine a more complicated bailout than this monstrous money hole. The $85 billion includes $40 billion in TARP infusions and about $45 billion in loans from a government credit line. The Federal Reserve has paid an additional $47 billion for troubled AIG securities, which it hopes to resell at some point in the future. And American International Group (AIG, news, msgs) can still tap another $30 billion in credit lines extended by the government.

All of that money has bought the feds 79.9% of the insurance giant -- the most it can own without triggering accounting rules that would effectively nationalize the whole company. To pay back the government, AIG has developed a long-term plan to break itself up and sell off various insurance divisions and other assets.

But the horrible economy makes it a fire-sale market, with many bids coming in at less than half the asking price. So it could be three to five years before all of AIG's assets have been spun off. The government's exposure should shrink later this year, when the $45 billion credit line drops to about $20 billion. But Ethisphere predicts that the government will recoup far less than what it has plowed into the sinking firm.

Chrysler ($14.9 billion). In March, the government gave Chrysler $7 billion to stay afloat. That money essentially disappeared when the company declared bankruptcy in April.

Then the government provided Chrysler an additional $8 billion in financing to help it exit bankruptcy in exchange for an 8% ownership stake in the new Chrysler. The idea is that Chrysler will go public at some point, sell shares and buy out the government's position. But the return to the government will probably be well below face value, since it holds a relatively small stake in a company that's still endangered.

"The government will get back materially less than its $8 billion principal," says analyst Stefan Linssen of Ethisphere.

Continued: A humongous pool of dodgy assets

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