February 14, 2012

WALL STREET IS recovering from the Great Recession, but the U.S. financial sector might not exist at all if Congress had not enacted a $700 billion bailout, the Troubled Assets Relief Program (TARP), on Oct. 3, 2008. In President Obama’s view, the financial industry owes the American taxpayer not only a debt of gratitude — but a debt, period. His fiscal 2013 budget proposal includes a plan to charge large banks $61 billion over the next decade, to recoup the expected net cost of the TARP program.

What could be fairer? As the budget notes, Wall Street firms “contributed to the financial crisis through the risks they took,” and “benefited enormously” from the bailout. The TARP law itself requires the president to submit a plan for recovering any shortfalls from the financial industry, so that TARP “does not add to the deficit or national debt.”

But Congress doesn’t have to approve it — and it shouldn’t. Whatever the banks’ sins, and they are legion, ripping off taxpayers via TARP is not one of them. The Treasury Department turned a $13 billion profit on its $245 billion bank capital injection. In other words, the banks paid the money back, with interest. If Treasury faces paper losses on TARP now, it is due in large part to the bailouts of insurance giant AIG, General Motors and General Motors’ erstwhile finance unit, now known as Ally Bank.

Treasury spent $51 billion for a majority stake in GM, $4.4 billion of which has already been written off and $23.2 billion of which has been recovered in a sale of stock to the public. That leaves $23.4 billion. If the government sold its remaining 500 million shares at current prices, it would receive roughly $12.5 billion, for a loss of $10.9 billion. The government got out of its investment in Chrysler at a net loss of $1.3 billion.

Why should “the banks” be on the hook for that? The Obama administration cites the TARP statute, but it’s not clear that Congress intended the financial industry to pay for an auto bailout, since it took creative interpretation of the TARP law (during the waning days of the Bush administration) to permit its use for the Detroit rescue in the first place.

TARP was the price the country paid for a public good — financial stability — that the country needed. It’s inconsistent for the president to hail the bailout of one private industry — autos — while playing politics with the bailout of another — banking — that was and is no less necessary to a modern economy. It compounds the inconsistency to demand that the latter pay for the former.

The notion that the banks would “pay” is phony anyway, since any new federal charge on them will simply get passed along in the form of higher consumer fees, tighter credit, or some combination thereof. TARP benefited the American people as a whole. The honest, transparent way to pay for it is to impose higher taxes, reduce spending, or both, for the American people as a whole.