'Too Big to Fail' – real story's not over

By Eamon Javers, CNBC Washington Correspondent

The HBO movie “Too Big To Fail” ends just after the early stages of the financial crisis in 2008, when Congress dramatically reversed course and passed the massive TARP program in the face of a cratering Dow Jones Industrial Average and fears of an economic apocalypse.

But of course, the real story didn’t end there. After the timeframe of the movie, TARP, which was originally sold as a way to buy “troubled assets”—hence the acronym "Troubled Asset Relief Program"—became much more than that. And before it was all over, the Federal Reserve would swell its balance sheet by epic amounts, dwarfing the TARP bailout itself.

Since then, the government has been dutifully plugging away at reducing its holdings in the wide range of companies it found itself steward over during the crisis. There have been stunning turnaround stories: GM stripped itself of legacy problems and engaged in a wildly successful IPO in November. AIG sold off large portions of itself to private buyers and is poised for a “re-IPO” selling government shares into the private market this week. TARP’s big-bank recipients paid back their loans—with interest—and although many small community banks still owe Uncle Sam, the bank bailout as a whole actually earned a profit for the US taxpayer.

By any measure, the government intervention was a staggering success at staving off calamity and preventing a second Great Depression.

Still, the sheer scale of the government’s holdings and the different rates of recovery of various industries involved means that the US government and the Federal Reserve still control huge chunks of the private sector. And in many cases there doesn’t seem to be any viable exit strategy available for years to come.

Start with Treasury, which controls assets inside the TARP program and independent of it.

Inside TARP, Treasury still holds $23 billion in investments in banks—largely small community banks that have not yet gotten back on their feet. It owns 92 percent of AIG—a figure that will likely change this week—and 33 percent of General Motors. It also holds 6.6 percent of Chrysler and 74 percent of Ally Financial, which is the new name of GMAC, the old financing arm of GM. On top of all that, there are $16 billion in credit market programs.

Outside TARP, the government holds $118 billion in agency-guaranteed mortgage backed securities and holds $162 billion in Freddie Mac and Fannie Mae preferred stock resulting from the nationalization of the two housing finance giants.

It is Freddie and Fannie that today seem like the biggest sticking point for the government’s hopes to exit the private sector. Washington hasn’t yet figured out what to do about the mortgage giants, and although both Democrats and Republicans express varying degrees of support for getting the government out of the mortgage business, no one has yet come up with a consensus plan to do that without tanking the housing market and taking the rest of the economy along with it.

But the biggest money is at the Federal Reserve, where it has always been. While the political class and the public were captivated with the heat and light of the battle over hundreds of billions of dollars in Congressional bailout aid, the Fed much more quietly injected trillions of dollars into the US economy by purchasing toxic assets and all sorts of securities.

Today the Fed has begun to sell off some of those holdings, but enormous quantities remain. The Fed holds $2.5 trillion in securities on its books and about $15 billion in loans, among other assets.

And then there are the quaintly-named “Maiden Lane” special purpose vehicles. Those are entities created by the New York Fed to serve as a holding tank for toxic assets from Bear Stearns and AIG. Today, there is about $63 billion in all three Maiden Lane portfolios. Shockingly, the toxic assets of 2008 are not quite so toxic in 2011: the Fed has begun selling off bits of the Maiden Lane portfolios to investors who think they may be worth something some day.

In Hollywood, every story has to have three acts. But in real life, we’re only now moving into the fourth act of the play—the long, slow slog of unwinding the massive holdings that the government absorbed at the height of the crisis.

Now we all have to hope that the government can clear the wreckage of the last crisis in the years before the next economic calamity inevitably arrives.