So Far, So Good as TARP Turns One

NEW YORK (TheStreet) -- As the one-year anniversary of the government's capital injection program approaches, the promise that taxpayer investments would be profitable has been fulfilled in some cases, and appears close in others.

But other bailout programs apart from TARP look as though they will keep taxpayers in the red for many years to come. And a large part of why the TARP investments have been profitable is because of onerous dividends and favorable terms, not because the actual investments have seen a meaningful increase in value.

For instance, the terms of the TARP program provided the government with warrants to purchase common stock. The strike price for these warrants declines by 15% every six months for the first 18 months of the investment. The cheaper the strike price, the less the government would have to "pay" to enter the position, and the more theoretically profitable the investment will be when the common shares are then sold into the market.

Starting on Wednesday, the government will have benefitted from a 30% cumulative decline in the strike price of its TARP warrants. As a result, its entry price for Bank of America (BAC) is $21.55 for the initial TARP investment, and $9.31 for the additional capital to cover Merrill Lynch losses, rather than the strike prices of $30.79 and $13.30 at the time of investment.

The difference is significant. If the government exercised the warrants and sold the new BofA shares into the market at yesterday's closing price of $15.40, it would have earned a total of $512 million.