TARP -- Delivering as Promised

It's tough to argue with success. The TARP program was created in a time of great national peril. But the people who devised it and executed it, working under enormous pressure, wagering the highest stakes in history, appear to have taken a series of steps that have worked. The plan might have a few flaws, but it worked. Let's keep that in mind.

Treasury's TARP, AIG Bailout Costs Fall to $30 Billion

Friday, October 1, 2010

The price to taxpayers of the bailouts and financial rescue of 2008 and 2009 continues to fall sharply. In figures to be released later today, the Treasury Department will report that the final net cost of the TARP is expected to be about $50 billion,Yahoo! Finance has learned. Add in expected returns from Treasury's interest in insurance company AIG, and the final net cost will be closer to $30 billion.

The news of the shrunken cost, which comes on the two-year anniversary of the legislation that created TARP, represents a dramatic improvement. It highlights the resilience of the markets, as well as the folly of short-term financial projections. In August 2009, the TARP cost was projected to be $341 billion. In its mid-session review, released in August of this year, the Office of Management and Budget projected the total cost would come to $91 billion.

In an interview this morning, Treasury Secretary Timothy Geithner credits several forces with bringing the cost down. Strong action by the Central Bank to guarantee assets and intervene in markets was vital.

"This worked only because it was combined with the creativity and the force of the Fed," he said. A modest recovery in the economy "from a period in which people thought it would be the end of the world" helped reflate assets and markets. And the Bush and Obama administrations pursued a policy that combined broad-based asset guarantees with tough pressure for banks to recapitalize on their own.

The figures, which are based on current market prices, likely won't do much to bolster the popularity of the program. Geithner won't be asking his predecessor, Henry Paulson, to join him for a victory lap around the Mall in Washington.

In the fall of 2008, Congress authorized the government to spend up to $700 billion to shore up the quaking financial system, and it is common for critics to refer to TARP as a $700-billion program. But the full amount was never spent. The TARP had several components. (The full roster and details can be seen here.) Some components were designed as pure expenditures rather than investments, such as the nearly $30 billion earmarked for the Home Affordable Modification Program (HAMP).

Apart from the funds spent on housing, Treasury now doesn't expect to lose money. In the central component of the TARP, the capital purchase program (CPP), Treasury purchased shares of preferred stock in hundreds of banks. Of the $205 billion invested in banks through the CPP, $153 billion has been paid back. With dividends ($16 billion) and the sale of warrants Treasury received ($6.9 billion) bringing in more cash, the program is on a glide path toward break-even.

In the TARP Two Year Retrospective, published today, Treasury now projects a profit of $16 billion on the CPP and other programs to aid banks. Geithner argues that the choices made by the Obama administration in early 2009 — to avoid full nationalization, subject banks to stress tests, and push them to raise capital — were central to this outcome.

"Preemptive nationalization would have been vastly more costly," he said.

Two huge wild cards remain. First, AIG. The insurer received more than $180 billion in support from Treasury and the Federal Reserve, including $69 billion in TARP funds. AIG last week issued a plan to extricate itself from the various financial relationships it has with the Fed and the Treasury. The centerpiece is a plan to convert Treasury's preferred shares into common stock representing about 92 percent of AIG, and then sell it slowly over time.

If it succeeds, Treasury will ultimately see gains of $16 billion on its holdings in AIG. Of course, while several TARP exits have come more quickly than expected, these plans rest on market conditions remaining favorable for some time.

In the first half of 2009, Geithner said, the government figured it would take five to eight years to extricate itself from AIG. Today, he concedes it could be a matter of years, "but in the low single digits." Treasury should complete its sales of Citi stock by the first quarter of 2011.

Second, there's the $81 billion invested in the automobile sector, most of it in General Motors and related entities. Of that, $67 billion remains outstanding, and GM's upcoming initial public offering is likely to make only a small dent. Treasury now expects that it will ultimately lose $17 billion on its efforts to aid the auto industry.

"The returns we'll get from our investments in banks and AIG will be more than enough to cover the money we'll lose in autos," said Geithner.

While Geithner, Paulson, and those who argued that the net costs of TARP would be a fraction of their original advertised cost have been vindicated, the Treasury secretary suggests profits aren't the proper measure to use when evaluating TARP.

"I don't like to focus too much on just the accounting cost," Geithner said. "We weren't in the business to make money. Even if they had lost much money, that would have been the right thing to do."

Instead he points to metrics such as the speed at which the price of borrowing came down in 2009, the resumption of economic growth in the second half of 2009, and the speed with which banks raised private capital to replace public funds.

"I think it's an excellent record for careful financial stewardship."

These figures likely won't do much to rehabilitate the popular image of TARP. Americans generally regard the program as having been conceived in sin, and attitudes against it have hardened.

Through TARP, the government still has a portfolio of $184 billion in "investments" it never wanted — in banks, car companies, AIG, and vehicles created to purchase toxic assets. And even with profits in TARP's core programs, taxpayers will be saddled with other bailout-related costs, such as the assumption of the debt of Fannie Mae and Freddie Mac.

More broadly, the benefits of TARP, which was sold as a way to get credit flowing again, haven't always been apparent to most Americans. Treasury has been engaged in a campaign to educate the public about the net cost and impact of TARP. But at a time when Wall Street firms are performing well and unemployment remains high, it remains a difficult sell.

TARP has been an enormous success from a policy perspective — it saved the financial system and averted a second Great Depression at a very low price to taxpayers. But politically, like the assets it was designed to remove from banks, it remains toxic.