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No one likes TARP, but it's working

Thursday, April 1, 2010; A14

THE TROUBLED Assets Relief Program (TARP) goes out of business in October, and not many Americans will be sorry to see it fold. The $700 billion program, hastily improvised at the height of the global financial panic in September 2008, broke all the rules of free-market capitalism. It put taxpayer money at risk to bail out banks, auto industries and insurance companies, including one behemoth, American International Group, whose irresponsible gambling in the derivatives markets infuriated even the usually placid Federal Reserve chairman, Ben S. Bernanke. Small wonder that the original TARP legislation barely made it through Congress, amid rhetoric about Wall Street greed and creeping socialism.

Yet today it is clear that TARP not only has been successful but, in a real sense, also a great deal for taxpayers. The latest indication is news that the Treasury Department plans to sell its 27 percent stake in Citigroup by the end of the year, at a likely profit of $8 billion. To be sure, these estimates are subject to the volatility of the stock market; by announcing that it wants to exit Citi in the short run, the Treasury risks getting clipped by an unexpected price drop before its self-imposed target date. Still, the sell-off would wean the troubled financial giant off most public support much earlier and at a much lower cost to taxpayers than was once expected. Once the sale is complete, the government will have recouped about three-quarters of the $245 billion worth of capital it pumped into financial institutions.

The remainder will take longer to come back, because many smaller regional banks still need a capital cushion against expected commercial real estate losses. Nor did TARP rekindle bank lending as much as had been hoped. But Treasury officials now expect the ultimate cost of TARP to come in at less than $100 billion. Most of that, by the way, will reflect losses not at banks but at General Motors, Chrysler and AIG, the first two of which are not even financial institutions. Bank lending should pick up once a sustained recovery generates more demand for loans. In short, for all its shortcomings, TARP has fulfilled its chief purpose: to stem the panic-induced collapse of a banking system that -- contrary to much conventional wisdom -- was indeed salvageable without total nationalization. The only fair measure of TARP's costs is in comparison to the costs of the averted collapse. And by that measure, it was a bargain.

There is another lesson here: TARP was a bipartisan policy. Conceived by a Republican administration, it passed Congress with votes from both parties and has been implemented mostly by a Democratic administration. When the country faced imminent disaster, political leaders suppressed ideology and partisanship -- and acted, in the national interest. If only they could apply some of that same spirit to problems before they reach the crisis stage.

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