The Cost of TARP
As I’ve mentioned now and again, complaints about a “$700 billion bailout” that allegedly passed the congress last fall tend to ignore the fact that the actual fiscal cost of the TARP program is almost certain to be much lower than that. Today, via Planet Money we get the CBO’s latest estimate (PDF) of what that cost will be—$159 billion. Now of course $159 billion is a lot of money. But $541 billion is even more money, and that’s the difference between the latest estimate of the true cost and the “$700 billion” rhetoric that’s been flying around. Here’s the breakdown:
Note that a majority of the $159 billion in losses is accounted for by the auto industry bailout and the mortgage modification plan, the aspects of TARP that I think tended to attract the least criticism from the left. Of the $595 billion actually used on financial system bailouts, only $69 billion is actually being lost.
34 Responses to “The Cost of TARP”
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June 29th, 2009 at 1:14 pm
The old fashioned way of doing it is to wait to see how much gets paid back before you calculate the TARP losses. Estimates are nice, but if the past couple of years have taught us anything relying on estimates of value in the financial industry are subject to manipulation.
June 29th, 2009 at 1:15 pm
Prediction: with the publication of this data, concern about the long-term budgetary impact of the TARP will – let me get the verb tense right here – immediately cease to have ever been the Republicans’ objection to it.
June 29th, 2009 at 1:17 pm
Well this does seem like good news, I had no idea the expected totals of what would acutally be used was so low.
I see lots of charts showing how absurdly large our debts and deficit will be over the rest of Obama’s term. Do those charts use these reduced numbers or do they use the fully allowed amounts?
June 29th, 2009 at 1:23 pm
“only $69 billion is actually being lost”
yeah, a billion here, a billion there and soon you’re talking real money.
Why do tax payers lose ANY money in this scenario? If the government had paid out any insured losses through the FDIC and ignored the shadow bank industry, we don’t lose.
If the government had simply broken up and re-sold the bankrupt shadow institutions we might have made some money.
Instead, we bail out bad investments that weren’t insured, lose 69 Billion (with a B) to date – and that’s a win?
Drink the coolaid…
June 29th, 2009 at 1:25 pm
So, where did the mythical $700 billion figure come from?
June 29th, 2009 at 1:27 pm
Phaedrus,
Except for the part where half the financial industry disappears, nobody can get a mortgage or business loan, and we go into another Great Depression – but, hey, one year, we would have had a smaller deficit!
Neuroskeptic,
$700 billion was the amount authorized by Congress to be lent/spent under TARP. The people plopping that number onto the deficit were assuming that none of it would ever be recouped.
June 29th, 2009 at 1:31 pm
Multiplier 541/700 or .88; much less than one.
Every dollar spent on TARP cost an Yglesias constituent 23 cents.
June 29th, 2009 at 1:32 pm
That would make sense, Mattyoung, if the purpose and effect of TARP was limited to profiting on repayments.
June 29th, 2009 at 1:40 pm
Multiplier 541/700 or .88; much less than one.
Every dollar spent on TARP cost an Yglesias constituent 23 cents.
I don’t have any idea what this is supposed to mean. Every dollar spent cost me 23 cents (where did that come from?), so $159 billion cost me $36.6 billion? And the first line is equally baffling. 541/700 is .77, not .88, which is in fact less than one (though not much less). Is that supposed to have some relevance? The point is that we’re apparently going to spend $541 billion less than a lot of conservatives seem to think we will, and that’s an awful lot of money that it should be noted to mention since they love talking about deficits so much.
June 29th, 2009 at 1:42 pm
Why do tax payers lose ANY money in this scenario? If the government had paid out any insured losses through the FDIC and ignored the shadow bank industry, we don’t lose.
The FDIC would have run out of money long before it could have covered all the insured deposits. It can barely keep up with just the smaller bank failures it has been handling.
So, very likely this plan would have cost the taxpayers much more, not less, than the current plan. And we wouldn’t even have gotten a functioning banking system for our trouble.
June 29th, 2009 at 1:47 pm
TARP was proposed to buy bad assets from banks, but that never happened. Then the money was used instead to inject capital.
But the real action was at the Fed, which essentially bypassed the big banks and lent directly by buying commercial paper and guaranteeing money funds.
The Fed also guaranteed other big bank transactions and even allowed Goldman-Sachs and Morgan,Stanley to become commercial banks so they could get in on the deal. Now GS and MS can get free money from the Fed, then move it to trading activities where they can make big bets on our dime.
The real losses haven’t yet been recognized. The FASB changed the mark-to-market rules, so the big banks don’t have to recognize their losses. All those securitizations will just set on the balance sheets at phoney values until, so the plan goes, future profits can absorb them.
June 29th, 2009 at 1:55 pm
Note that a majority of the $159 billion in losses is accounted for by the auto industry bailout and the mortgage modification plan, the aspects of TARP that I think tended to attract the least criticism from the left. Of the $595 billion actually used on financial system bailouts, only $69 billion is actually being lost.
I think the conservatives stand vindicated by the actual results, don’t they? That the auto-industry rescue and the mortgage modifications are turning into fiscal nightmares, while the bailout involving a far larger sum is actually costing less?
June 29th, 2009 at 2:02 pm
I think it’s going to take a quite a bit longer to evaluate the effects of the auto and mortgage bailouts, Myles.
June 29th, 2009 at 2:04 pm
Establishment of a new Pecora commission is supposedly moving along in the House. A new commission is sorely needed to sort all this out, especially if someone like Jamie Galbraith is made chairman.
The original commission did a great job and instigated a new regiman that served well for over 50 years.
June 29th, 2009 at 2:07 pm
Lowell @6:
DTM @10:
I never understood this, maybe you can help. Almost none of the big losers were covered under the FDIC – they chose to operate without a safety net and lost. They also were the major creators of questionable mortgage products.
If the FDIC saved banks, but let these other financial institutions go under, how does that lead to a great Depression? My local bank/credit union was not leveraged to the hilt (terms of the FDIC don’t allow it) and it wasn’t highly invested in dubious securities (thank local management). So my local bank is fine and performs all the services it always did – mortgages, small business loans, etc. Where’s the problem?
Big investment firms (Goldman, Lehman, etc.) go under and the investors lose. If there are legitimate business concerns that need money, I’m sure there are other sources, or temporary government sources could be found until they are organized, then the debt handed off.
I’m not an economist – but the big “the world stops if Goldman goes under” line seems like a scare tactic to get us to bail them out.
June 29th, 2009 at 2:11 pm
@11: Correct. The Fed has simply become the only bank engaged in actual financial intermediation. Just read Bernanke’s papers between 2000 and 2004 to gain the insider’s view.
@12: Incorrect. I’m not particularly interested in delving into the hocus pocus used by CBO to calculate “Estimated Subsidy” or the primitive number from which it’s derived. But looking at the numbers for AIG and Citi, I can assure you that someone took a serious bong hit before they opened Excel. Ain’t no way AIG is going to pay back anything near $35 billion; Citi won’t pay anything back.
June 29th, 2009 at 2:18 pm
ron @14: I wouldn’t hold my breath. I heard Sen. Gillibrand speak this weekend about requiring hedge funds to have reserve ratios. Her view of bringing shadow banking regulations into line with brick-and-mortar banking regulations would result in considerable capital flows to Europe and Asia.
June 29th, 2009 at 2:18 pm
Phaedrus,
For one thing, many of the responsible banks had other, perfectly ordinary dealings with the Big Losers. If those Big Losers had just died and not repaid their debts, they would have taken a lot of of the responsible banks with them.
Secondly, the non-banks were a big chunk of the lending market. Even assuming that the collapses in my first point didn’t take down the whole financial sector, it still would have been a fraction of what it had been.
June 29th, 2009 at 2:18 pm
Those numbers will grow.
$700 billion is a lot of money but pales in comparison to the $13 total spent, lent, promised or printed for the entire bailout, including stimulus, regime.
http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html
June 29th, 2009 at 2:21 pm
I never understood this, maybe you can help. Almost none of the big losers were covered under the FDIC – they chose to operate without a safety net and lost. They also were the major creators of questionable mortgage products.
I’m not sure where you are getting this notion. There were many hundreds of billions of dollars in FDIC-insured deposits among BoA, Citi, Wachovia, WaMu, National City, and so on.
So my local bank is fine and performs all the services it always did – mortgages, small business loans, etc. Where’s the problem?
Again, among other things the problem was that many people’s “local bank” was actually a branch of BoA, Citi, Wachovia, WaMu, National City, and so on.
June 29th, 2009 at 2:29 pm
Joe from Lowell:
You are missing a few things. If we really practiced capitalism, other banks would fill the void. How many times do we need to keep propping up Citi? Or Goldman Sachs? You can keep your scary scenarios. The real cost everyone is forgetting is all the Fed guarantees to the banks. Those number into the trillions. The CBO is only looking at a small part of the bigger picture, sad to say.
June 29th, 2009 at 2:32 pm
If we really practiced capitalism, other banks would fill the void.
This is the theory Secretary of the Treasury Andrew Mellon promoted at the beginning of the Great Depression (in part with the expectation that his family’s bank would be one of the banks to gain market share). And he was right . . . the problem is just that it took many years for Mellon to be right, during which time unemployment skyrocketed and economic resources in general were wasted.
June 29th, 2009 at 2:36 pm
rapier:
I think you meant trillion, not $13.
June 29th, 2009 at 2:48 pm
What ron said @11: TARP was really only a fraction of the overall bank bailout. Brad DeLong had a post a week or so ago guesstimating the losses through AIG alone at $300 billion, and that’s just another fraction of the bailout.
Equating TARP to the bank bailout as a whole is fundamentally incorrect, and will produce wrong conclusions.
June 29th, 2009 at 2:54 pm
It is disheartening that so few commentators are willing to speak the truth about our economy.
Simon Johnson is the most forceful when he speaks of the US becoming a banana republic, with wall street the new oligarchy:
http://baselinescenario.com/2009/06/07/global-crisis-and-reform-starting-a-long-journey/#more-3972
Krugman has the biggest pulpit but he is also apparently a bit of a careerist, not willing to speak the truth to power.
The US is in dire shape, has been drifting lower for 30 years.
Without major reform, the damage be severe and millions will suffer for no good reason. And the greed of a few will have been the cause.
June 29th, 2009 at 3:07 pm
Hold the cheering for now, the funds have not yet been returned to the Treasury and are likely to be used for other systemic conditions that remain: Commercial Real Estate and Credit Card losses.
The biggest problem right now is commercial real estate. There is a about $500B coming mature in the next few years and I can tell you first hand that there is little if any financing available to meet those needs. I have numerous clients with performing loans which came due already this year and could not refinancing with existing lender or other markets. Instead of foreclosing, they sign 6-12 month extension. It is not sustainable and there does not seem to be any enthusiasm by private markets for commercial real estate now or anytime soon.
Expect about $250B be dedicated to meeting these maturities and another $50B for credit cards on top of what has already been ponied up.
They are going to have to inject another massive dose of liquidity to the market in order to meet existing and near term demand.
As far as AIG, much of that figure is placed as collateral and a figure on paper alone. As long as they survive and their credit rating doesnt crash, none of those calls with be made. with the US treasury so heavily invested, they will always protect those collateral calls from happening, because they would foot a enormous bill
June 29th, 2009 at 3:28 pm
rapier:
I think you meant trillion, not $13.
Made you look.
Apropos not, they are bringing in Leonardo himself to paint the tape for the end of month, end of quarter, end of half year. It’s a beautiful thing.
June 29th, 2009 at 3:38 pm
Much of the money was used for operating expenses.
June 29th, 2009 at 4:00 pm
The United States needs a National Bank. The country must, at some point in the very near future, isolate itself -as much is humanly possible- from private sector madness, or we are not going to survive. It is that simple.
June 29th, 2009 at 4:42 pm
Yeah, eventually, after the depression ended. And also, people will stop starving after a few years, too. That’s why we don’t “really practice capitalism.”
June 29th, 2009 at 9:48 pm
Hmmmmm. I understand that my local bank may be a branch of one of these large institutions (BoA, etc.), but I’m hazy on how it hurts me if BoA goes out of business. Many (44?) banks have gone out of business this year, and the FDIC handled the transition of assets – what is different for the big guys?
Are they so insolvent that the government can’t cover the assets – in which case the idea that TARP funds have bailed them out seems to fall apart.
Or did we really succeed in bailing them out, in which case why isn’t the FDIC transferring the assets to other parties like in the other cases?
It really seems like we performed an FDIC-like acquisition but aren’t getting the benefit, just the loss.
AIG is a different story, right – FDIC has nothing to do with that, it is an insurance company. We bailed them out like GM, so lumping them in with banks seems odd. Again, if they can’t cover their losses I can understand the government stepping in to avoid chaos, but then AIG goes away, right?
It seems like “I gave uninsured financial institutions $69 Billion dollars and all I got was this lousy T-shirt”. Shouldn’t the AIG investors and employees have lost all that money instead of tax payers, and, given the amount of money we gave, shouldn’t the state have a controlling interest in these companies?
June 30th, 2009 at 9:57 am
I understand that my local bank may be a branch of one of these large institutions (BoA, etc.), but I’m hazy on how it hurts me if BoA goes out of business. Many (44?) banks have gone out of business this year, and the FDIC handled the transition of assets – what is different for the big guys?
Taking the last issue first, the difference to the FDIC is the amount of insured deposits. Consider the IndyMac failure. It had around $19 billion in deposits, and paying off the depositors ended up costing the FDIC about $9 billion (after selling IndyMac’s assets). This was a pretty big blow to the FDIC’s Deposit Insurance Fund (DIF), which just before taking in IndyMac stood at about $45 billion.
Now take BoA. It has something like $600 billion in deposits (give or take–I don’t know the exact count as of right now), roughly thirty times as much as IndyMac had. If BoA failed and the cost ratio to the FDIC of paying off BoA’s depositors was remotely the same, there is no way the DIF could cover it.
So, that is why the FDIC has been able to handle the smaller bank failures so far, but couldn’t handle a bunch of big bank failures: it doesn’t have enough funds in reserve to cover the insured depositors at the big banks.
Note, though, that the FDIC may not even be able to handle all the small bank failures going forward. Specifically, there is a looming crisis in commercial real estate that may wipe out so many smaller banks that the DIF couldn’t cover them either. That has happened before, by the way: the same basic thing also happened in the Savings & Loan crisis, which required setting up a special entity (the Resolution Trust Corporation), and cost the taxpayers around $120 billion.
The broader picture for banking customers is that if enough big banks went out of business, there wouldn’t be enough banks around to keep the banking system functioning well, even if all the insured deposits got paid off. Now if all you are doing is making deposits, and you got paid off, you might not care–in a worst case scenario, you just stuff your money in a mattress. But if, say, you are running a small business reliant on credit to make payroll, and your bank goes out of business and you can’t find another bank willing to extend you credit, your business will fold. And if you were an employee of that business, you will lose your job. And so on. And again, this has happened before: large numbers of bank failures have severely worsened economic crises in the past, most recently during the early stages of the Great Depression.
Are they so insolvent that the government can’t cover the assets – in which case the idea that TARP funds have bailed them out seems to fall apart.
I’m not quite sure what you are asking, but here is a brief overview. In most cases, if you liquidated a bank’s assets you would not have enough money to cover the bank’s insured deposits. That is not the standard for considering a bank insolvent, however–modern fractional reserve banking allows a firm’s liquid assets to be less than its insured deposits.
So, part of the idea has been to try to prevent the big banks from failing such that we don’t need to liquidate their assets and pay off the insured depositors. And this could work if the big banks end up with enough new capital to survive their anticipated losses due to the collapse of the housing bubble and general recession. Note that not all this new capital is coming from the government: some new capital is also coming from private sources, which is part of why our loss exposure is less than it might otherwise be.
Anyway, if that effort to keep the big banks from actually failing is successful, that will cost the taxpayers a lot less than liquidation and paying off the depositors would have cost us. And most importantly, we will get a functioning banking system out of the process.
It really seems like we performed an FDIC-like acquisition but aren’t getting the benefit, just the loss.
I’m not sure what you think is the benefit of an FDIC takeover. The basic purpose of the FDIC is to prevent systemic bank runs by providing depositors with the assurance that even if their bank does fail, they will get their money back. Again, the FDIC doesn’t make profits on bank failures, and instead usually the DIF is charged with something. And if a large chunk of the banking industry fails, the FDIC has basically failed in achieving its purpose.
Shouldn’t the AIG investors and employees have lost all that money instead of tax payers, and, given the amount of money we gave, shouldn’t the state have a controlling interest in these companies?
We actually do have a controlling interest in AIG, but that is really beside the point: the U.S. government as a sovereign has more power over these companies than the U.S. government as majority shareholders. As for losses, the original shareholders of AIG were effectively wiped out. I’m not sure what you have in mind when you reference “employees”–are you, for example, saying the janitors and secretaries at AIG should lose their life savings? What about managers responsible for business units that didn’t actually lose money? In any event, even if you got some sort of clawback, it wouldn’t cover more than a tiny amount of our investment in AIG.
June 30th, 2009 at 10:27 am
DTM, thank you so much for your time. These are questions I’ve had for a while and I appreciate your reasoned response, free of snark.
I’m beginning to understand the point you make about a functioning bank being worth more than it’s assets – better put, that selling a bank won’t necessarily pay it’s debts (even a solvent bank).
In the Scandavian take over, the government held assets until they matured and actually made some money – how does this effect the idea that the bank’s assets may not cover losses?
Also, the idea that there won’t be capital for small business seems flawed. I own a small business and some of the sources of funding available are government backed loans – it seems like an expansion of that program would address the problem directly without funding bad banks. I’ve also heard that lending has all but dried up anyway – the major institutions using their bailout money for operating costs or to bolster their balance sheet.
I continue to learn the ins and outs of this, but I guess my biggest beef is that we, the tax payers, pulled their nuts out of the fire and it seems like we’re the ones taking the risk and getting a hair cut. I think Congress and the administration basically structured this to be as bank friendly as possible (that is a major source of income for them) and so I bristle when Yglesias says the loss is less than some predicted, and that’s a good thing. If the people who created this mess are still highly paid executives a year from now it will be just another indicator that America is anything but capitalist.
I think that’s the rub – I want to quit this talk of market forces etc., stop the fiction – and recognize that, when the rubber meets the road, our government will side with business over tax payer, and that isn’t the way it should be.
Again, thanks for your responses – I’m taking a lot of thinking points away from this discussion
June 30th, 2009 at 2:09 pm
In the Scandavian take over, the government held assets until they matured and actually made some money – how does this effect the idea that the bank’s assets may not cover losses?
Actually, I think the Swedes still lost something like 40% of the public funds they put into banking (depending on how you calculate rates of return). So the Swedish approach isn’t loss-free.
Meanwhile, we are currently much closer to a Swedish approach than many people seem to think: the Swedes did take large equity stakes and more or less wipe out existing shareholder in a few big banks, but they also guaranteed the creditors of the banks they didn’t take over. Meanwhile, we already took some equity in TARP participants (in the form of warrants, and like the Swedes we are likely going to make some money there), and we are converting TARP funds to equity in some cases (e.g., Citibank).
So we do have some upside exposure, just not enough to make it likely at this point that we will profit overall. But that is the same basic outcome the Swedes got.
Also, the idea that there won’t be capital for small business seems flawed. I own a small business and some of the sources of funding available are government backed loans – it seems like an expansion of that program would address the problem directly without funding bad banks.
We’ve done some of that too, mostly through the Fed. But the bottomline is that the government doesn’t have the staff or infrastructure to replace all the big banks, so we need to keep most of them operating in order to keep just basic deposit-and-lending banking functioning.
I’ve also heard that lending has all but dried up anyway – the major institutions using their bailout money for operating costs or to bolster their balance sheet.
Taken together, the major indicators (spreads, volumes, and so on) indicate that lending has recovered at least somewhat, but that we still have some ways to go to get back to normal. Note that bolstering balance sheets isn’t necessarily incompatible with getting lending going again.
If the people who created this mess are still highly paid executives a year from now it will be just another indicator that America is anything but capitalist.
For what it is worth, a lot of heads have already rolled. That said, I think focusing too much on the particular individuals involved in the past is a bit of a mistake: going forward, we need better regulations, because bad regulations will inevitably be exploited, and indeed firm owners will find executives willing to do the exploitation if they think it will enhance their returns.