April 27, 2012

Shutting Down the TARP Party

Hester Peirce

Former Senior Research Fellow
Summary

The newly confirmed Special Inspector General for TARP, Christy Romero, published the latest quarterly report on TARP this week. The tone of the report is markedly different from the victory lap that Treasury ran earlier this month. The report opens with the stinging reminder that “[i]t is a widely held misconception that TARP will make a profit.” To put it mildly, the SIGTARP is not taking part in Treasury’s premature TARP celebration.

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The newly confirmed Special Inspector General for TARP, Christy Romero, published the latest quarterly report on TARP this week.  The tone of the report is markedly different from the victory lap that Treasury ran earlier this month.  The report opens with the stinging reminder that “[i]t is a widely held misconception that TARP will make a profit.”  To put it mildly, the SIGTARP is not taking part in Treasury’s premature TARP celebration.

The SIGTARP’s report pointed out that TARP is not over, its record has not been as rosy as some are suggesting, and there are a lot of potential roadblocks standing in the way of future success.  Some TARP programs are still handing out money and have the authority to spend another $50.2 billion.  A lot of TARP money remains unpaid -- $118.5 billion to be exact.  $14 billion is gone, with no hope of recovery.  Much of the remaining $104.5 billion is tied up in hundreds of small banks and large companies, like AIG and General Motors.  Taxpayers still have $14.5 billion in GM’s former financing arm, Ally Financial.  Prospects of swift repayment are not brightened by the possibility that Ally’s mortgage subsidiary, ResCap, may soon file for bankruptcy. 

About half of the original participants in TARP’s bank rescue program remain in the program, and many do not have a viable way out.  Almost half of the banks that left used a different pot of taxpayer funds to “repay” the taxpayer’s initial TARP investment.  Treasury has been modifying the ownership structure of the government stake in some remaining TARP institutions to make their survival more likely and to minimize taxpayer losses.

The SIGTARP’s report makes the important point that the indirect TARP burdens matter too.  One of these is moral hazard – people who expect to be able to convince the government to pay the bill are more likely to engage in risky behavior than those who don’t have access to the taxpayers’ purse.  Another burden is the cost of TARP fraud, including finding and punishing those whose criminal activities TARP has facilitated.

The TARP story is not over.  Let’s not throw a party yet.