Major U.S. banks were allowed to repay the Treasury for the first time last week, escaping the clutches of the Troubled Asset Relief Program (TARP). While it will be some time before taxpayers see a return on their entire $700 billion investment, the 10 financial firms that were approved to exit TARP should be returning about $68 billion to the Treasury in the near future.

There was a significant controversy in the fourth quarter of 2008 as to how banks were using the TARP funds, and whether the money would ever be returned. However, for at least 10 solvent financial firms, it seems that taxpayers made a reliable investment. In addition, even financial firms like Bank of America and Citigroup, once thought to be lost causes, have shown remarkable resilience in the face of the now waning economic crisis. Bank of America, which took $45 billion in TARP funds last fall, managed to raise almost all of the $34 billion in government mandated capital to hold in reserve in case economic conditions worsen. Bank of America could repay the TARP funds by the end of the year.

While the timetable for Citigroup remains a bit hazier, Citi chairman Richard Parsons stated that the bank plans to pay back the $50 billion in aid it received from the TARP, though he didn’t indicate a date. In order to repay the money, banks have to gain the approval of both the Treasury Department and their respective federal regulator, proving that they will remain capitalized and continue to lend after returning TARP funds. Banks must also capable of issuing debt without government assistance.

It’s quite unlikely that banks will be imposing stricter standards in the future for financial firms that want to exit TARP, thus provided banks stay in the black, all the TARP funds will be repaid in time. But much of it also depends on the state of economy.

 While the 19 banks that underwent the stress test all passed, and now seem well on their way to repaying the TARP funds, there’s still a huge chunk of the TARP funds that aren’t being counted with the others. The elephant in the room is insurance giant AIG, which received $40 billion from the Federal Reserve in the initial allocation of TARP funds. AIG posted a quarterly loss of more than $60 billion in the fourth quarter of 2008, the biggest quarterly loss in U.S. corporate history. In addition, AIG has shown no indication that it intends to climb out of the red in the near future.

On the whole, AIG has borrowed in the neighborhood of $180 billion from the government, which includes a $150 billion rescue package from last November, and an additional $30 billion in aid after posting their $60 billion fourth quarter loss. AIG managed to lose almost $100 billion in revenue in 2008. The amount of aid AIG has received makes the aid the 19 stress tested banks received seem paltry in comparison. What’s more alarming is it doesn’t like AIG will be able to return that investment… ever.

While banks are looking up, AIG is one of the primary forces dragging down the U.S. economy, and it’s being kept on life support in the background despite being eligible for the moniker of worst run business in U.S. corporate history. AIG was one of the financial institutions deemed “too big to fail”, thus it has received constant aid despite remaining insolvent. AIG invested capital in its own sub-prime mortgage backed securities; one of the riskiest moves a company can make. When the housing market collapsed, AIG was hit twice as hard as the competition.

It’s not all together clear as to how AIG was allowed to make such risky investments while being monitored by various independent and federal watchdogs. However, it is clear that the company made a series of poor decisions, and is now being rewarded for it. While the fall of AIG might have had more serious repercussions than keeping it alive as a vegetable, as the economy improves, Americans will start to demand the government to take action on AIG.

The Detroit automakers and AIG are the last real questionable corporate investments made with TARP funds, and Detroit has shown a desire to improve, though it might not happen until the automakers can roll out their newer car models. AIG, however, has shown little initiative towards addressing its troubled assets (pun intended).

There’s still more than $100 billion outstanding of the $199 billion the Treasury lent to the banks from the TARP fund. While a little more than a third of that is now pending, and the rest is coming, the entire TARP investment in financial institutions won’t be more than about half repaid until AIG makes a move.

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