Bank Bailout Cost Decreases Again

I reported on the rapidly diminishing estimates of TARP costs last month. Today, AP reported ("Lower bailout estimate assumes higher stock prices") that the total cost to taxpayers has decreased again, to $105.4 billion, according to the The Treasury Department. The White House and Treasury maintain different estimates.

Other estimates:
Congressional Budget Office, March 2010, $109 billion

TARP Will Cost How Much?

In the beginning, TARP was announced and it would cost $700 billion.

Then banks began repaying, and the cost was lowered to $341 billion in August 2009.

Then some warrants and preferred stock, and the cost was reannounced at $117 billion.

April 23rd, TARP losses were re-estimated to be as low as $85 billion.

At this pace, the U.S. Government will soon be announcing profits from TARP.

Hysteria a Sure Contrary Indicator

It is always useful to observe the other market participants. Not so much to see what they are doing so you can copy them, but to observe emotional overreactions that are telltales. Today Henry Blodget declared that Bank of America's (BAC) repayment of TARP funds was a bad thing.

If he weren't so hysterical about it, he might have been able to make a case. In this situation, however, the overreaction would seem to be good indicator that people are against the bank for reasons that are more emotional than logical, but that it is otherwise on the right track (65% chance). So paying back TARP is a good thing for BAC and its investors. The future course for the stock is up.

Let's suppose BAC were to obey Blodget and not repay TARP. Then it would be subject to further negative publicity, could possibly fail to find a CEO in a timely fashion (40% chance), and would likely be constrained in its business and employment practices that are either self-imposed out of fear (90%) or by the Government directly (30%), or both. It would also be the convenient scapegoat for bank-haters.

If BAC pays back TARP, it both violates the expectations of those who expect BAC to fail or to fail to pay back TARP and elevates the bank's status. If your conception of BAC is that it can't do those things, then suddenly you have cognitive dissonance. Hence the histrionics.

Now, whether it is a good and proper thing to hate banks is not the subject of this post. There may be societal value to having a goat to heap your scorn upon, or not. The point here is that the telltale says to buy BAC shares.