Did TARP Really Pay Off for Taxpayers?

A few Sundays ago, the Troubled Asset Relief Program quietly expired. But it certainly lives on as an issue in next month's elections. Politicians who voted for the bank bailout bill have been running away from the fact, and the Obama administration has been working hard to show that the program actually made money for taxpayers. In a Washington Post editorial 10 days ago, Secretary of the Treasury Tim Geithner called the program "the most maligned yet effective government program in recent memory." Today Bloomberg News chimed in under the headline, Wall Street Bailout Returns 8.2% Profit, Beating Treasury Bonds.
Unfortunately, American voters judge it rather differently. What they recall is a $700 billion blank check written to Wall Street banks, despite their having just piloted the economy into the side of a mountain. Picturing how bad things might have been without TARP, policy makers largely side with Geithner. Recognizing how bad things are even with TARP, voters disagree.

To evaluate the program, think back to the panicky days of late 2008. At the time, policy makers from the outgoing Bush administration and the incoming Democrats found themselves in a fast-moving crisis for which there was no manual. "It was clear to me that everyone from both administrations was flying in the dark without a control tower," says Jonathan Baron, a psychology professor at the University of Pennsylvania and the editor of the journal Judgment and Decision Making. So they tried everything: The Federal Reserve exercised never-before-imagined powers. The FDIC expanded its insurance protection. The Obama Administration rammed through a $787 billion stimulus package. And Congress passed TARP, giving the Treasury the authority to spend up to $700 billion to bail out struggling banks (along with GM and Chrysler).

The collective effort succeeded in ending the financial panic, and Treasury never came close to spending the authorized $700 billion. Indeed, TARP's total cash outlay is likely to be less than $50 billion after the loans are all paid back. The program could even turn a profit overall-not just on the financial bailouts cited by Bloomberg--if the equity investments in auto makers and banks pan out.

On the other hand, TARP didn't save the world all by itself. Harvard economist Kenneth Rogoff argues that Federal Reserve actions and loan guarantees from the Federal Reserve and FDIC did more to calm markets. As for the price, $50 billion sounds cheap for dodging the next Great Depression. And it would be, say CPA J. Mark McWatters and University of Kentucky economist Kenneth Troske, two members of the Congressional panel charged with oversight of TARP, except that any fair accounting of TARP has to include the $389 billion cost of nationalizing Fannie Mae and Freddie Mac, and the Fed's purchase of $1.25 trillion of mortgage securities. Together those two programs didn't just prop up the banks; they literally provided the cash that allowed them to pay back their TARP loans.

In toting up the program's costs, it's also important to look long term. Like any strong medicine, TARP had some potentially dangerous side effects:

• TARP enshrined the "Too Big to Fail" doctrine. TARP gave the Treasury Department the power to determine who lived and who died in the crisis, and under what terms. Thus, the major money center banks were all but explicitly anointed as survivors, at whatever cost to taxpayers. Backed by that implicit guarantee, all of those institutions can borrow more cheaply and take bigger risks than they otherwise would-setting the stage for the next financial crisis.
• It left small banks out in the cold Toxic-loan-infested banks like Citigroup and Bank of America were rescued, but not smaller institutions like, say, Premier Bank of Jefferson City, MO, one of three banks to go under last Friday (bringing the year's total to 132). Granted, a small bank's failure won't incite a panic, but that doesn't mean their extinction has no cost. "Community banks are the main source of loans for small and mid-sized businesses," points out Columbia university economist and Nobel laureate Joseph Stiglitz. "And who does most of the hiring? Small businesses."
• It let reckless banks off easy. The loans extended under TARP were exceedingly generous, considering the risk that taxpayers could have been stuck with the bill for massive failures. Warren Buffett got better terms for his investment in Goldman Sachs just a few weeks before TARP. "When you've got someone by the balls in a negotiation, you squeeze," says Karl Smith, assistant professor of public economics at University of North Carolina. "We should have taken the banks for more than we did."
• Voters may veto a TARP next time Public anger at TARP runs so high that some banks reportedly have refused TARP money rather than bear the stigma. "The extreme unpopularity of TARP has made it all but impossible to do anything remotely like it again," wrote Princeton economist Alan Blinder in his evaluation of the program.

In fact, that biggest failure of TARP may be this: Voters never believed in it. While the program may not have been a great investment, it did deflect a financial panic, and future policy makers may desperately want it in their bag of tricks, should they need to save the world again. Unfortunately, the program worked by appearing to save the fat cats at the expense of taxpayers. TARP has made itself so unpopular that next time voters might prefer not to be rescued at all.

[An earlier version of this article first appeared on The Fiscal Times.]

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