Plugging the Deficit With TARP Funds - TheStreet



) -- The idea of closing the federal deficit with funds from a bailout program that has its own deficit requires a bit of mental wrangling.

The federal budget gap is politically unpopular for the Obama administration, which has been attacked by fiscal conservatives for its "tax and spend" policies. On Thursday afternoon, the Treasury Department released data showing that the deficit widened to $176.4 billion in October, up 13% from the year-ago period. Job losses have eaten away at revenue while spending - on a litany of economic programs, financial stability plans, health care, jobless benefits and two costly wars - has only escalated. The Treasury predicts that the deficit will increase to $1.5 trillion in fiscal 2010, from $1.4 trillion in the year ended Sept. 30.

The issue looms larger now that Democrats have lost, or barely scraped by, in several elections around the country earlier this month. Independent voters, it seems, have been shaken by all the taxing and spending, even if the policies are part of a delicate balance meant to prevent a more severe economic decline.

The Troubled Asset Relief Program, or TARP, is another political football that lawmakers have frequently attempted to launch, avoid or misconstrue. (That's despite the fact that 74% of the Senate and 60% of the House voted "yea" to TARP under the Bush administration last year, and a majority -- albeit less robust -- renewed the bailout program in January.)

Showing the public that Obama's team is working dutifully to close the budget gap would be a good thing. Showing taxpayers that some of it will be filled by profitable investments in big, bad banks like

Goldman Sachs

(GS) - Get Report


JPMorgan Chase

(JPM) - Get Report


Morgan Stanley

(MS) - Get Report

, and unspent money that might otherwise have been used for their more troubled peers, would be an even better thing.

But a more cynical taxpayer could look at it another way.

More than $85 billion has been returned to the government from banks that accepted TARP but no longer need it. That includes $70.7 billion in outright repurchases; $2.1 billion in loan principal repayments; $9.5 billion in dividends and interest payments; and $2.9 billion in extinguished or exercised warrants.

The government expects another $50 billion to be returned within the next year and a half, according to testimony by Herbert Allison, the Treasury's assistant secretary for

financial stability

. It's unclear whether that figure stands for principal alone, or factors in dividends, interest, warrants and the like.

Some of those funds are likely to come from

Bank of America

(BAC) - Get Report


Wells Fargo

(WFC) - Get Report

, who have both said they are ready to begin repayment as soon as the government allows it. (Since Moody's and others predict that even

American International Group

(AIG) - Get Report

will one day repay its own mammoth bailout, perhaps


(C) - Get Report

will return some taxpayer funds as well.) Either way, those banks and more than 640 others will continue paying dividends on the $228 billion in outstanding TARP investments, according to SNL Financial, until they are fully repaid.

Just accounting for where TARP stood through Sept. 30, $85 billion has been repaid, with interest and dividends, out of $561 billion doled out. Simple math says that leaves the program itself wanting for $476 billion. Those inclined to perform mathematical acrobatics might also factor in the $139 billion in TARP money authorized but unspent, still leaving a significant gap.

Simply put, the reason unspent and repaid TARP money can be used to lower the federal deficit is really because assumptions have changed. As the economy and financial sector have gotten less worse, budget experts are able to predict that fewer taxpayer dollars will be required to solve the problem. It doesn't mean that TARP is in the black, nor will it be: Over the life of the program, the government expects TARP to lose $200 billion.


Written by Lauren Tara LaCapra in New York