THERE is still plenty of time for America's banking strategy to fail miserably—a new round of economic contraction could lead to new troubles for large banks, or inadequate regulatory reform may allow moral hazard plays to sow the seeds of a future crisis—but for now it looks pretty remarkably good. On top of the return to near normalcy in credit markets, we have the fact that the American government is earning some nice returns on its investments:

In contrast to Switzerland, which sold its 9 per cent UBS stake for a SFr1.2bn ($1.1bn) gain last week, the world’s other large economies – except the US – are sitting on combined losses of $10.8bn relating to their holdings in the equity of listed banks they bailed out over the past 12 months. The US government, by contrast, is sitting on a paper profit of almost $11bn on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial institution.

That comes on top of the gains already banked from TARP repayments:

In spite of criticism of the bail-outs of lenders such as Citi, Bank of America and Wells Fargo, the Treasury has reaped gains from the coupons payable under the troubled asset relief programme bail-out funding, most of which has been repaid. The government said it had earned an annualised return of 23 per cent from its $10bn investment in Goldman Sachs under Tarp. In June, Goldman returned the $10bn and later paid another $1.1bn to buy back warrants attached to Tarp aid. Morgan Stanley, American Express and other banks have done the same, leaving taxpayers with substantial profits.

The government essentially bet that markets were beset by panic, and that once fear subsided banks would find themselves in better conditions and healthy enough to earn their way out of insolvency. At this point, even AIG is telling the government it will eventually be able to repay its assistance.

This doesn't mean that the government couldn't have crafted a better solution to the crisis, but it does suggest that those bemoaning the high cost of the bail-out and basing their estimates on worst case scenarios involving no repayments were way, way off base.

(Via Tim Fernholz).