The tale of TARP

Sunday, October 3, 2010; A18

AS THE PRIMARY defeats of several members of Congress already have shown, voters loathe the idea of showering Wall Street with their money through the Troubled Assets Relief Program (TARP). They loathed it when the Bush administration proposed it in the fall of 2008, they loathe it after nearly two years of Obama administration stewardship and they have not forgiven legislators who courageously supported it. So, as TARP expires Sunday -- a month before the mid-term elections -- it's not surprising that administration officials are furiously trying to spin it as a success story. Yet sometimes the spin is true: TARP, reviled by populists of the left and right, produced more benefit for the U.S. economy at lower cost to taxpayers than even its strongest initial supporters expected.

At this time in 2008, the United States and, indeed, the world, were in the grip of full financial panic. After the fall of Lehman Brothers, the irrational confidence with which financial institutions had once supplied money to each other gave way to an equally irrational mistrust. Something had to be done to restore confidence, lest a second Great Depression take hold. To be sure, the original TARP concept -- a fund to purge the banks' balance sheets of illiquid assets -- proved unworkable. But Bush administration policymakers, with the support of the incoming Obama administration, pragmatically switched to a direct infusion of capital. Later, Treasury Secretary Timothy F. Geithner ordered a "stress test" of top U.S. banks so as to further reassure markets of their liquidity. To the amazement of many who had demanded more radical steps such as nationalization, TARP plus the stress tests did, indeed, stabilize the banking sector.

Of the $259 billion that TARP pumped into the banks, $187 billion has been paid back, with interest. Most of the remainder is parked with smaller banks, not Wall Street giants, and the Treasury Department credibly projects turning a $20 billion profit on that effort.

If TARP produces losses for the taxpayer, it will be elsewhere. Government support for the insurance giant AIG was particularly galling, given that the systemic risks that necessitated it stemmed from AIG's reckless derivatives operation. In the view of many, bailing out AIG, via not only TARP but massive Federal Reserve loans, also bailed out its counterparties, such as Goldman Sachs and a host of European banks. Nevertheless, the government and AIG have unveiled a plausible plan for selling off Treasury's share of the firm in the next few years. The success of that plan, like that of a similar one to return General Motors to private hands, depends on market conditions. But there is at least a fair chance that Treasury will break even.

Of all the uses of TARP, the only one that has clearly failed is the attempt to channel mortgage relief funds to troubled homeowners. But even in that case, there's a silver lining: So few people ended up qualifying that TARP has spent hardly any of the $41 billion it set aside for the job.

Originally budgeted at $700 billion, TARP is now capped at $475 billion and is shrinking. The Congressional Budget Office projects its ultimate price tag at $66 billion. To that must be added the intangible costs of breaking the basic rules of market accountability and fostering a "too big to fail" mentality. Also, extending TARP to GM and Chrysler stretched its statutory mandate and gave the government ownership of industrial companies -- an even riskier role for the state, if perpetuated, than supporting banks. There is no denying that TARP is not the sort of thing the U.S. government should normally undertake.

Still, the costs of TARP -- tangible and intangible -- have to be considered in the context of the unprecedented emergency that faced the policymakers who adopted it. They must be weighed against the costs of not intervening. Financial stability is a public good, but it isn't free. TARP helped save the United States from an economic collapse and bought time to get America's house in order under calmer circumstances. Goodbye, TARP. Good riddance -- and thanks.

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