Two years and billions later, was bank bailout worth it?

McClatchy NewspapersSeptember 30, 2010 

WASHINGTON — A wildly unpopular government rescue program credited by economists with preventing another Great Depression will go out of business Sunday, two years to the day it was created.

On Oct. 3, the Troubled Asset Relief Program, known as the bank bailout bill, loses authorization to make new expenditures. From that point forward, TARP will be in wind-down mode, although much of money lent out already has been repaid — at a profit for taxpayers.

Originally envisioned as a blank check for the government to spend as much as $700 billion to rescue the financial system, the actual cost to taxpayers is estimated now to be only a seventh of that amount. The government has earned almost $13 billion in dividends from the bank stock it received in exchange for the taxpayers' investment, and earned another $8.2 billion from the sale of preferred stock.

The Treasury Department estimates that taxpayers are still on the hook for about $100 billion at this point — a number expected to shrink with continued repayments and asset sales. The non-partisan Congressional Budget Office recently put the estimated total TARP cost at around $66 billion.

Thursday, White House Press Secretary Robert Gibbs said the latest internal estimates put the number under $50 billion.

Still, TARP became politically poisonous. People considered it free money for Wall Street executives whose recklessness dragged the world into the Great Recession. Now those executives are wallowing in bonuses again while taxpayers remain plagued by 9.6 percent unemployment.

"Objectively, TARP has been an economic success. Politically it's been a miserable failure," said Darrell West, director of governance studies at Washington's Brookings Institution, a center-left policy research center.

Even though TARP was a Bush administration initiative and got strong congressional support from Republicans in 2008, today's GOP has painted TARP alternately as a Wall Street bailout or a cash kitty to fund Democrats' wish list.

"TARP turned out to be a slush fund," said Sen. Mike Johanns, R-Neb. "I would come to the office in the morning and see the latest thing the president has spent money for out of the TARP fund. It just turns my hair gray."

President Barack Obama "has not done as good a job communicating as he should. He's allowed the opponents to frame the issue unfavorably," West said.

In the recently released "Pledge to America," a campaign document from Republicans in the House of Representatives, GOP lawmakers vow billions in savings by eliminating the TARP.

Problem is, recently passed legislation to revamp financial regulation already did that, and set the Oct. 3 TARP expiration date. That legislation also prevents the Obama administration from taking repayments to TARP and directing them to other priorities.

When first presented by then-Treasury Secretary Henry Paulson, TARP money was supposed to be used to buy toxic assets from banks to bolster their balance sheets, allowing them to resume lending. Soon after the Oct. 3, 2008, creation of TARP, however, Paulson shifted gears and chose instead to inject $245 billion directly into banks.

That infuriated politicians and taxpayers alike. Then in 2009, after taking taxpayer money, many of the financial firms paid their executives huge bonuses.

Some $40 billion in TARP money was also used to backstop insurer American International Group, which was rescued by the Federal Reserve in September 2008 to shore up the financial sector.

In December 2008, President George W. Bush authorized some $17 billion in TARP funds to help General Motors and Chrysler avoid bankruptcy. Eventually, expanding under Obama, some $82 billion in TARP money went to rescue the two automakers and keep credit flowing to their suppliers.

Unsavory as it was politically, economists credit these TARP efforts with helping to stabilize the financial sector and preventing and even worse outcome.

"I think it was a great success. The bank bailout part of TARP was an astounding success. Couldn't have gone any better," said Mark Zandi, chief economist with forecaster Moody's Analytics.

For politicians who voted for TARP, however, the challenge remains how to sell voters on the idea that it prevented something bad from happening.

"I don't know of a single person who says if we hadn't done this, we'd be better off today," said Senate Banking Committee Chairman Christopher Dodd, D-Conn., who is retiring and won't face the voters' wrath in November.

Of the $245 billion injected into 707 financial institutions, all but about $54 billion has been repaid. Of that outstanding amount, $30.75 billion is owed by big global banks that were subjected to special "stress tests" by regulators last year. The federal government still holds $16.5 billion of common stock issued by Citibank, for example.

However, several large regional banks, including SunTrust Bank, Regions Bank, KeyCorp and Fifth Third Bank, respectively still owe $4.85 billion, $3.5 billion, $2.5 billion and $3.4 billion. The Treasury Department expects to be fully repaid, with interest and profit from its TARP cash injections.

"These weren't made as individual investments to save individual companies. They were meant to stabilize the system and the overall economy. And in that regard, this program has really been a success, and I think anyone who looks at it objectively will realize that," said Tim Massad, the acting assistant Treasury secretary for financial stability.

TARP is also unlikely to be fully repaid for the rescue of GM and Chrysler either. GM has bounced back better than expected, and the company has announced its intent to issue stock either later this year or early next year. However, that isn't expected to recoup fully the $49.5 billion in taxpayer aid to GM. Full repayment will take longer.

So if the automotive rescue doesn't break even, was it still successful?

"Yes. If you believe that we should be keeping manufacturing going in America, because what you would have lost if we hadn't gotten involved was not simply General Motors, but a substantial part of the supply chain, and that would have had a negative effect on Ford," said House Financial Services Committee Chairman Rep. Barney Frank, D-Mass.

At a recent breakfast meeting with reporters, Frank said there's more involved that just a sum.

"The problem is if you say you owe us $10 billion, it's a failure. OK, we would have had $10 billion and no significant automobile manufacturing in America and no affiliated set of industries in America," he said. "I think that would have been worse."

Still, in the end TARP is likely to lose money. Forecaster Zandi expects the final sum to be around $90 billion. More than half of that will be TARP money designated for foreclosure relief and other mortgage finance efforts.

While $90 billion to $100 billion in final TARP expenses seems likely, Zandi and other leading analysts think it was money well spent in preventing an economic collapse.

"Ninety billion dollars is obviously well below the $700 billion appropriated and well worth the price. We got well more than $90 billion out of TARP," Zandi said.

ON THE WEB

August TARP report to Congress

GOP Pledge to America

Zandi-Blinder paper on how recession brought to end

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