How Will TARP Bailout Plan Be Remembered?

By | September 30, 2010

It may have staved off a financial system meltdown, but the U.S. Treasury’s $700 billion bailout program is so reviled by the public that its distaste may rub off on incumbent Democrats in November elections.

What goes into the history books about the program, however, is still under debate.

As the Troubled Asset Relief Program (TARP) nears its official expiration date Sunday, many may have forgotten that it was launched in the waning days of the Bush administration.

The Obama administration has been eager to remind voters of the program’s early bipartisan roots and to claim victory for its stewardship of taxpayers’ investments.

Ultimately, some analysts say, the program could end up costing less than $50 billion.

“I think this is the best federal program to ever be despised by the public,” said Doug Elliott, a senior fellow at the Brookings Institution, a Washington think-tank.

“There’s such a huge dichotomy between public perception and what it actually did and how little it cost. The things that people are upset about regarding the recession would have been much worse without the TARP.”

Even the program’s harshest critics have begrudgingly acknowledged that it was necessary — and effective — in preventing a major financial collapse. Some economists, such as Harvard’s Kenneth Rogoff, say TARP, along with other government bailout efforts, prevented a second Great Depression.

Giving taxpayer money directly to banks was not the program’s intended purpose. Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson marched into the U.S. Capitol two years ago with a $700 billion plan to buy up the toxic assets from banks that were stoking insolvency fears and choking off lending.

But this was deemed too slow and unwieldy to douse the raging firestorm in the markets and less than two weeks after Congress approved the program, Paulson pivoted to inject $125 billion in taxpayer capital directly into the top U.S. banks.

The plan worked, but the Treasury Department immediately came under fire for the move. Criticism intensified during the early days of the Obama administration after bailed out insurer American International Group disclosed massive bonuses for employees of the unit that brought the company to its knees.

The program’s most fundamental problem — and its political Achilles’ heel — was perhaps unsolvable: the inherent unfairness of bailing out the financial executives whose reckless decisions put the entire economy at risk.

But another key problem, according to former International Monetary Fund chief economist Simon Johnson, was that the terms for the banks were far too easy — the top bankers all kept their jobs, and most of them kept their bonus structures.

“TARP was a giveaway,” Johnson said. Echoing many critics, he argues the program cemented the perception that some firms were too big to fail and would always be saved by the government — a perception he believes will persist despite an effort to address the problem with an overhaul of financial regulations.

LET HISTORY (AND MONEY) JUDGE

But Treasury Secretary Timothy Geithner is determined to portray TARP in heroic terms. During a congressional hearing last week, he thanked both Republicans and Democrats for approving the program.

“I know a lot of people who voted for TARP decided later that they had to distance themselves from that vote by disparaging the programs, but they should be proud of the votes they cast — they were on the right side of history,” he said.

The Treasury Department is expected to announce within days a plan to convert the preferred shares it holds in AIG into common stock it can sell over time. Geithner could then argue taxpayers may well profit from what was universally regarded as the most distasteful bailout of the financial crisis.

Soon after, the Treasury is likely to issue a revised estimate of the ultimate cost of TARP to taxpayers, an estimate that has steadily shrunk over time.

It already is claiming that its main bank rescue effort, the $205 billion Capital Purchase Program, will earn a profit, even though many small banks are having a hard time repaying.

From original projections of more than $500 billion, the Obama administration has estimated TARP’s net cost at around $105 billion, with the bailouts of AIG and automakers each costing about $30 billion and housing rescue programs also weighing.

The nonpartisan Congressional Budget Office forecasts a $66 billion loss, and some analysts have said the ultimate loss could come in under $50 billion. Most of this would come from efforts to modify mortgages that offer no opportunity for recovery.

Comparatively, the Federal Deposit Insurance Corp a decade ago estimated the total taxpayer cost of resolving the savings and loan crisis in the 1980s and 1990s at about $153 billion.

Getting the money back could help foster a more nostalgic view of TARP, said Elliott, a former JPMorgan investment banker.

“The public had it in their minds that this was $700 billion that was just flushed down the toilet,” he said. “The best hope for TARP supporters is that in the gaze of history, this looks like it was the right thing to do.”

(Reporting by David Lawder; editing by Carol Bishopric)

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