The Big Lie—TARP Made Money

The Obama Administration and most liberals repeat over and over that TARP didn’t cost taxpayers a dime and that it made money. Yet it is a lie. SIGTARP (Special Investigator General of TARP) says in its latest report to Congress that so far we have lost $60 billion and another $118.5 billion  is owed and unpaid. 

Here is an excerpt from the SIGTARP report. The report basically repeats the other lie (that TARP and other programs saved the economy from collapse), but it makes some interesting points about the bailout. It is a must read: 

After 3½ years, the Troubled Asset Relief Program (“TARP”) continues to be an active and significant part of the Government’s response to the financial crisis. It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost). …

While TARP and other Government responses to the financial crisis may have prevented the immediate collapse of our financial and auto manufacturing industries, and improved stability since 2008, the tradeoff is not without profound long-term consequences. A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed “too big to fail.” TARP’s legacy also includes the impact on consumers and homeowners from the large banks’ failure to lend TARP funds. TARP continues to be subject to criticism that TARP helped large banks but not homeowners. In addition, after 3½ years, community banks have an uphill battle to exit TARP because they cannot find new capital to replace TARP funds. Finally, TARP’s legacy includes whitecollar crime that SIGTARP is uncovering and stopping.

A recent working paper from Federal Reserve economists confirms that TARP encouraged high-risk behavior by insulating the risk takers from the consequences of failure – which is known as moral hazard. The Federal Reserve economists reported how the large banks that received Government bailouts through TARP are now taking more risks than banks that did not receive taxpayer money. According to the Federal Reserve economists, the loans that the bailed-out banks are making today are riskier than those of their non-bailed-out counterparts. In contrast, the Federal Reserve study indicates that community banks that received TARP funds are taking fewer risks than their larger counterparts, in part because they use the TARP funds to bolster their capital. Many of the same large banks have greatly increased their executive compensation despite the fact that regulators have stated that compensation played a role in causing the crisis by encouraging risky behavior.

As a nation, we cannot become complacent and allow improved financial stability to lead us to relax our guard or forget about the urgent need to implement reform. Some of the moral hazard effects of TARP may eventually be addressed by full implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). However, important work by Treasury and the regulators to implement the Dodd-Frank Act is far from complete. Nearly 400 rulemakings are required by 20 Government agencies. As former FDIC Chairman Sheila Bair stated in May 2011, “The outcome of the next financial crisis is already being determined by decisions regulators are making today in the Dodd-Frank implementation process.”

Additionally, many of TARP’s goals have not been met. Even though the explicit goal of TARP’s Capital Purchase Program was to increase lending to U.S. consumers and businesses, the recent Federal Reserve working paper confirmed that the largest banks that received TARP funds did not increase their lending. In fact, these institutions have been lending less than their counterparts that did not receive a bailout. This may in part be due to Treasury’s failure to require or incentivize increased lending in exchange for TARP funds. Despite SIGTARP’s urging for more than a year, Treasury did not even require TARP recipients to report on how they used TARP funds, providing an opaque cover for those institutions that continued to cut lending.

Many smaller and medium-size banks are still feeling the effects of the crisis and are not exiting TARP with the same speed as the larger banks. More than 400 financial institutions remain in TARP. After 3½ years, Treasury has no concrete plan to help the remaining institutions get out of TARP and get back on their feet. The only TARP exit plan so far has been the Small Business Lending Fund (“SBLF”), which replaced TARP funds with other Government funds. As described in more detail in Section 3 of this report, while SBLF was aimed at requiring lending to small businesses in exchange for Government funds, it ended up being largely a program for culling the strongest banks out of TARP. More than half of Treasury’s $4 billion investment in this program went to swapping 137 TARP banks out of TARP, leaving behind banks that had weaker capital ratios, missed dividends, and were subject to enforcement orders from their regulator. To the extent community banks in TARP continue to face a sluggish recovery, non-performing assets, and capital-raising challenges, their lending to consumers – especially to small businesses – will remain constricted.

 The harder they try the worse things are.

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1 comment to The Big Lie—TARP Made Money

  • Hans

    Someone decided and then propagated the theme to the masses, not only for the sake of saving an entire industry and your savings from complete ruin, but it also generated a nice profit for the Central government.

    Gee, that was good, simple and timely as well…That takes care of ever having to worry about our banking system! I am sleeping better already.