By Timothy F. Geithner
Sunday, October 10, 2010; B03
Born at the peak of the financial crisis in 2008, the Troubled Asset Relief Program expired last week, ending what was perhaps the most maligned yet most effective government program in recent memory. Despite new evidence about the low ultimate cost and positive impact of the TARP, there is still a chasm between the perceptions of the program and its overwhelmingly favorable effect on the U.S. economy.
The TARP was doomed to be unpopular from inception, because Americans were rightfully angry that the same firms that helped create the economic crisis got taxpayer support to keep their doors open. But the program was essential to averting a second Great Depression, stabilizing a collapsing financial system, protecting the savings of Americans and restoring the flow of credit that is the oxygen of the economy. And it helped achieve all that at a lower cost than anyone expected.
As we put the TARP to rest, let's also put to rest some of the myths about the TARP.1. The TARP cost taxpayers hundreds of billions of dollars.
The true cost of the financial crisis will always be measured by the devastating losses of jobs, homes, businesses, retirement savings and fiscal revenues. But the cost of the TARP, which succeeded in reducing the overall economic damage, will be considerably lower than once feared. In fact, the direct budget cost of the program and our full investment in the insurer AIG is likely to come in well under $50 billion -- $300 billion less than estimated by the Congressional Budget Office last year. And taxpayers are likely to receive an impressive return (totaling tens of billions) on the investments made under the TARP outside the housing market.
Even looking beyond the TARP to the losses associated with Fannie Mae and Freddie Mac's pre-crisis mistakes, the direct costs of the government's overall rescue strategy are likely to be less than 1 percent of GDP. By comparison, the much less severe savings and loan crisis of the late 1980s and early 1990s cost 2 1/2 times that as a share of our economy.2. The TARP was a gift for Wall Street that did nothing for Main Street.
Financial crises matter not because they hurt banks and bankers. They matter because they kill jobs, businesses and the value of retirement savings. To protect Main Street from the damage caused by a financial crisis, you must first put out the financial fire. That is precisely what the government did.
In the fall of 2008, the Bush administration injected nearly $250 billion into our largest financial institutions and provided a guarantee, for a fee, to help them continue to operate. Those emergency actions, taken at a time of grave danger for the U.S. economy, were absolutely essential. Without them we would have seen a broader collapse and losses of millions more jobs and trillions more dollars in income and savings.
Those initial investments, which came with limited conditions designed to protect taxpayers, helped stop the free fall of the financial system. But by the time President Obama took office, credit markets were still severely distressed and the economy was contracting at an accelerating rate.
So we shifted strategy to recapitalize the financial system with tough conditions and with private money, not public funds. And we focused resources directly on the victims of the crisis, rather than on the institutions that helped cause it. After inheriting nearly $300 billion in commitments, mostly to large companies, we directed resources toward lowering mortgage rates, reducing foreclosures and helping restart the credit markets for consumers and small businesses.
In addition to the nearly $300 billion in tax cuts in the Recovery Act for working Americans and businesses, the new initiatives on which we spent TARP funds were for broad-based programs to lower lending costs and mortgage payments. And where we inherited commitments to individual institutions -- such as AIG and auto companies -- we acted to ensure that those companies were fundamentally restructured so they could survive without government assistance and ultimately repay the taxpayer.3. The TARP was a quick fix for the market meltdown but left our financial system weak.
The U.S. financial system has been completely overhauled and is in a much stronger position today than before the crisis. In fact, the weakest parts of the system are gone.
Of the 15 largest financial institutions before the crisis, four are no longer independent entities. Five were forced to restructure. Two have altered their legal form and are subject to much stricter federal oversight. Ten have seen major changes in senior management and boards of directors.
Investors in those institutions that didn't survive were wiped out. Investors in those that did faced substantial losses. Where firms could not finance themselves and the government was forced to take a large stake, our investments came with conditions that forced fundamental restructuring.
The firms that remain are less leveraged and hold much more capital (or financial reserves) against risk. They were forced by the stress tests we conducted to demonstrate that they could raise equity from private investors on the strength of their businesses.4. The TARP worsened the concentration of the banking sector, leaving it more vulnerable to another crisis.
It is true that the financial system is more concentrated today than it was before the crisis. This was unavoidable, but our banking system is still much less concentrated than the systems of every other major country and represents a smaller share of our economy. We have 7,800 banks, not two or five, and we are less dependent on banks overall for credit, with securities markets and other financial institutions providing roughly half of all credit to businesses and individuals.
More important, the financial reforms enacted by Congress in the Dodd-Frank Act created stronger protections for consumers and against excessive risk-taking than existed before the crisis. They include greater transparency, tight limits on size and further concentration, and a clear prohibition on taxpayer-funded bailouts.5. The TARP was the centerpiece of a strategy by President Obama to assert more government control over the economy.
The TARP was created by a conservative Republican president, who was also forced by the crisis to take over Fannie Mae and Freddie Mac, lend billions to the automobile industry and guarantee money-market funds. And the TARP was championed by the same Republican congressional leaders who are in office today. They deserve more credit for the courage they showed than they seem willing to accept now.
Before President Obama took office, the Bush administration committed nearly $300 billion under the TARP, including investments in banks representing more than three-quarters of the entire sector, two of the three big American car companies and AIG. That support was critical to preventing a complete system collapse, but it also represented a level of government involvement in our economy not seen since the Great Depression.
President Obama adopted a strategy designed to get the government out of the private sector as quickly as possible. To date, we have recovered more than $200 billion in TARP funds, as well as made $28 billion in profits. Our remaining investments in banks are a small fraction of what we inherited. And, in the end, 90 percent of that once-feared $700 billion TARP price tag either will not have been spent or will be returned to the taxpayers.
We will exit the AIG and automotive industry investments much faster than anyone predicted. General Motors is planning an initial public offering for later this year, and AIG has announced a restructuring plan that will accelerate the timeline for repaying the government.
The TARP is over. And as we put it behind us, it is worth noting that the financial security of all Americans is much stronger today than it would have been without the rescue strategy that the program made possible. It worked.
Timothy F. Geithner is secretary of the Treasury.
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