According to a report released by the Treasury on Tuesday, the $700 billion Troubled Asset Relief Program (TARP), which was initiated two years back to rescue the nation’s financial industry, will cost much less than anticipated. The Treasury has revised the TARP costs to $50 billion, down from $91 billion projected during its mid-session review in August 2010. This is also a quantum leap from the initial estimate of a loss of $350 billion.
As part of its efforts to recoup the TARP loans, the government has recently negotiated with American International Group (AIG) to free it of the exorbitant debt it had undertaken as part of its participation in the TARP. The Treasury had injected $70 billion to rescue the troubled insurer two years ago. The AIG stake sale is expected to result about $20 billion of return. If successfully concluded, the final net TARP cost would be down to $30 billion.
Though the TARP helped ballast the financial system to a great extent, it seems to have thus far failed to woo voters. Now, that’s still a lot of money, but one could probably make the argument that $30 billion is a reasonable trade-off for a stable financial system in just two years.
TARP: Use and Abuse
The road has not been smooth for TARP; its structure has invited much criticism. In a report in August, the Congressional Oversight Panel alleged that foreign companies reaped more from the U.S. bailout program than the U.S. companies realized from other countries’ bailout programs.
The billions of dollars injected by the U.S. government since September 2008 into several national financial institutions did not entirely help stabilize the financial system of the nation, as many of these financial institutions have substantial overseas operations, the Oversight Panel — along with Republicans in Congress — have pointed out. The companies benefiting from the program included giants like AIG, Morgan Stanley (MS), Bank of America (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and Citigroup (C). The rescue funds, which were offered to the U.S. companies, ended up at their overseas branches based in Canada, France, Germany, Great Britain and Switzerland.
There are many financial institutions and automakers that received TARP money but depend on foreign operations for a large portion of their revenues. For instance, out of a total of 87 financial institutions which have indirectly benefited from the bailout of AIG alone, 43 are non-U.S., according to the Oversight Panel.
All is Not Lost?
After two years of functioning, the TARP expired last Sunday. However, many of the banks have yet to repay the funds they had borrowed as part of their participation in the program.
Most of the major financial institutions have repaid their TARP loans in full, including JPMorgan, Bank of America, Wells Fargo, Goldman Sachs and Citigroup. Also, the Treasury has almost completed auctioning stock warrants it had acquired from such banks against the loans offered, which has helped return more of taxpayers’ money.
However, more than 600 banks still hold $65 billion in TARP funds. Regions Financial (RF) and SunTrust Banks Inc. (STI) are among the largest banks that have not yet managed to repay. Additionally, in August 2010, about 123 financial institutions failed to pay the compulsory dividend related to the TARP funds they had taken from the Treasury.
A substantial part of the TARP funds is expected to be lost in the Home Affordable Modification Program maze. Funds provided to General Motors and Chrysler are expected to be other major contributors to the loss.
With the expiration of the TARP, there is no chance of further jeopardizing taxpayers’ money. The Treasury is planning to sell its investment in Citigroup early next year and it expects to recover taxpayers’ funds invested in General Motors, which is planning to hold an initial public offering later this year.
The Treasury is also working with the regulators and 600 institutions, which still have not repaid the funds, to recover the money as early as possible.
For the Greater Good
Though we cannot ignore the drawbacks of the TARP which will force the taxpayers to incur losses to the tune of $30 billion, we think that the program has been effective in easing the pressure on markets for credit and capital. This has also restored confidence in the financial system to a great extent.
The decrease in TARP costs can be viewed as sign of economic recovery. Though any costs related to TARP is itself bad news, a reduced cost is at least not worse. Far from the censure it had faced, we think the TARP has turned out to at least be benign.
By Kalyan Nandy