TARP Edges Toward Profitability

The Troubled Asset Relief Program (TARP), despite being seen as a program for government support of companies that are too big to fail, and seen as a drain on the U.S. Treasury, might break even or be profitable, according to the 322-page Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Quarterly Report to Congress released January 26.

The U.S. Office of Management and Budget (OMB) estimated in August 2009 that TARP would cost the taxpayers $342 billion. Within about one year, OMB, in its November 2010 Congressional Budget Office Report, lowered its estimate to $25 billion.

The turning point for this prediction was the recapitalization plan of American International Group Inc. (AIG) and the recent public offering by the new General Motors Co.

“While Treasury’s ultimate return on its investment depends on a host of variables that are largely unknowable at this time, TARP’s financial prospects are today far better than anyone could have dared to hope just two years ago,” according to the SIGTARP Quarterly Report.

The TARP program expired on Oct. 3, 2010, which prevented Treasury from committing additional taxpayer funds for new applicants to the program.

Assessing TARP Financial Numbers

To date, $474.8 billion has been allocated under the 13 TARP programs, which include the Housing Program, Automotive Industry Support programs, and Capital Purchase Program, with the last being the Systemically Significant Failing Institution program used to stabilize AIG, Citigroup, and Bank of America. So far, $410.1 billion has been utilized, with the remainder obligated but unused and not cancelled.

Originally, the program received $700 billion, but was reduced to $475 billion by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which went into effect in July 2010.

By the end of 2010, close to 150 of those who benefited from the TARP program repaid $235.4 billion.

The Treasury collected $35.2 billion in interest, dividends, and miscellaneous income. This amount includes $10.2 billion from the sale of the U.S. government’s equity ownership in the respective companies.

TARP funds propped up 707 banks with $204.9 billion, of which $167.9 billion has been repaid. GM, Chrysler, GMAC, and Chrysler Financial received $80.7 billion, of which $25.8 billion has been repaid. AIG, Citigroup, and Bank of America also received funds under other programs, of which about 83 percent has been paid back to the Treasury.

Reservations on Death of Too Big to Fail Doctrine

“Many commentators, from Government officials to finance academics to legislators, have expressed concern that the Act [Dodd-Frank Act] does not solve the [too big to fail] problem,” according to the SIGTARP Quarterly Report.

The report notes that Thomas Hoenig, president of the Kansas City Federal Reserve bank, is certain that the too big to fail principle must continue to exist, because the five largest lending institutions grew by 20 percent, instead of having been reduced through divestments. Therefore, if any of them would go under, it would mean disaster for the lending industry.

“They control $8.6 trillion in financial assets—the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail,” Hoenig said.

 

Next: Professor puts blame squarely at the door of the U.S. government

Simon Johnson, professor at the Massachusetts Institute of Technology, puts the blame squarely at the door of the U.S. government. As long as U.S. government officials are attached to the thought that a bank’s default could result in worldwide financial disaster, the too big to fail doctrine will continue to

Analysts and financial experts are flabbergasted that the Dodd-Frank Act bestowed on the Federal Reserve oversight over financial institutions and gave the Federal Deposit Insurance Corporation (FDIC) regulatory authority.

The critics charge that by awarding institutions that neglected their duty to the taxpayer in identifying the impending financial calamity, the old buddy system remains intact. These institutions are beholden to Wall Street, and with their hands tied and blinders on, they are prevented from identifying catastrophes lurking around the next corner.

“Senator Kaufman and others have also questioned the wisdom of delegating so much responsibility to the very same regulators who performed so poorly in identifying the most recent crisis before it struck,” the SIGTARP report states.

Former Sen. Ted Kaufman, D-Del., who was selected to head the Congressional Oversight Panel for TARP in 2010 after Elizabeth Warren vacated the position, is a vocal opponent of the too big to fail dogma.

TARP Deadbeats Rising

At this time, 155 financial institutions have not made dividend or interest payments, amounting to $276.4 million, an increase of 31 percent since the last quarterly SIGTARP report. A total of 21.9 percent of banks are on the deadbeat list.

About 4 percent of the deadbeats will not have to pay Treasury unless they declare a dividend.

The taxpayer may never be repaid, as some of these banks have filed for bankruptcy. CIT Group Inc., a 101-year-old commercial bank filed for Chapter 11 in November 2009 and owes $29 million, the largest defaulted amount on the list. The second largest defaulter is First Bancorp, formerly First National Lincoln Corp., owing $26.8 million.

AIG is $7.9 billion in arrears, that is, it has not paid any dividends over the past two years. The only slap on the wrist AIG received is that the Treasury can appoint 20 percent of all AIG directors.

TARP Scorecard

“Although the Troubled Asset Relief Program (TARP) provided critical support to the financial markets at a time when market confidence was in freefall, the program has been far less effective in meeting its other statutory goals, such as supporting home values, retirement savings, and economic growth,” according to a September 2010 Congressional Oversight Panel press release regarding the panel’s report “Assessing the TARP on the Eve of Its Expiration.”

The Oversight Panel gave the Treasury a pat on the back for stopping a financial disaster, but its weaknesses are greater than its accomplishments.

TARP was more or less designed to prop up the financial system, and has not addressed the plight of homeowners, whose homes have depreciated substantially and who are either in foreclosure or on the verge of foreclosure.

Critics see TARP as a mismanaged failure, because it provided a generous bailout instead of letting market forces reign, demanding the firing of incompetent managers and putting failing institutions into receivership.

“The TARP’s ‘stigma’ has grown and may prove an obstacle to future financial stability efforts. ... TARP is today so widely unpopular—due in part to shortcomings in Treasury’s transparency and its implementation of TARP programs—that some banks refused to participate in the Capital Purchase Program for fear of losing customers. The unpopularity of the TARP may mean that the government will not authorize similar policy responses in the future. Thus, the TARP’s greatest consequence may be that the government has lost some of its ability to respond to financial crises,” according to the Oversight Panel press release.