The Troubled Asset Relief Program (TARP)

CASE STUDIES

This year we expanded the scope of the Cost of Government Day Report to include a number of case studies. The purpose of these case studies is to explore the possible effects the implementation of certain policies has had, or would have, on the 2009 COGD.

TARP Overview

TARP is on its way to failure

Effects on COGD

The Troubled Asset Relief Program (TARP)

TARP Overview:

The year 2008 earned itself a dubious distinction, and may well be dubbed the “Year of Government Bailouts.” What started with Bear Stearns and then continued with Fannie Mae and Freddie Mac, A.I.G., and the financial markets bailout package passed by Congress at the end of September 2008, has left taxpayers with a massive tab. But beyond that, it has also turned into the launching pad for calls for government to assume even greater control over the financial market, opening the door for regulatory overkill and irreversible damage to our economy.

As critics had feared, the original framework of the Troubled Asset Relief Program which was signed into law in October 2008 by President George W. Bush as a part of the Emergency Economic Stabilization Act (EESA) of 2008 was quickly abandoned, and the scope, size and complexity of the program considerably expanded. Originally, the legislation authorized the Department of Treasury to purchase, manage, sell off or insure up to $700 billion of “toxic” assets, primarily troubled mortgages and mortgage-backed securities, for the supposed purpose of restoring liquidity and stability to the financial system. What has followed is an incremental and still ongoing expansion of the reach of the federal government into the free market.

Instead of purchasing “toxic assets” – the rationale under which the program was sold to Congress and the public – Treasury opted for injecting TARP money directly into regulated financial institutions through the Capital Purchase Program (CPP).

Shortly thereafter, TARP funds were repurposed to prop up failing unionized Detroit automakers under the Automotive Industry Financing Program (AIFP), and restructure the assistance previously provided to Citigroup and A.I.G. In March the Treasury announced the launch of the Term Asset-Backed Securities Loan Facility (TALF). At the time of writing this report TARP funds have been used in connection with twelve separate programs that total to around $3 trillion.

From the originally authorized $700 billion, $355.4 billion were committed under the Bush Administration and $344.6 billion were left for use and made available by Congress under the Obama Administration.

At the time of writing this report, 628 entities had already received funds from the program. The biggest recipients of TARP are:

A.I.G. with $69.8 billion
General Motors – $68.7 billion
Citigroup - $50 billion
Bank of America – $45 billion
JPMorgan Chase, Wells Fargo – $25 billion

Chrysler – $17 billion
Goldman Sachs Group – $10 billion
Morgan Stanley – $10 billion
PNC Financial Group – $7.6 billion

Automakers, not considered at all in the first version of the Program, have so far received almost $85.7 billion of taxpayers’ money. Banks have been given $237.3 billion, while specialty lenders received $13.7 billion. The most infamous recipient was probably A.I.G., the first insurance company to receive TARP funds, after it had previously been given $85 billion in September 2008.

In May 2009 Treasury announced that it was prepared to inject up to $22 billion into six other insurers: Hartford Financial ServicesGroup, Prudential Financial, Principal FinancialGroup, LincolnNational Corp., Allstate Corp., and Ameriprise Financial. However Allstate Corp, Ameriprise Financial, and Prudential Financial rejected the Treasury offer.

Program	Projected TARP Funding (in billions)
Capital Purchase Program (CPP)	$218
Term Asset-Backed Securities Loan Facility (TALF)	$80
Public-Private Investment Program (PPIP)	$75
Systematically Significant Failing Institutions (SSFI)	$70
Making Home Affordable (MHA) Program	$50
Automotive Industy Financing Program (AIFP)	$21
Unlocking Credit for Small Businesses (UCSB)	$15
Asset Guarantee Program (AGP)	$12.5
Auto Supplier Support Program (ASSP)	$5
Capital Assistance Program (CAP)	TBD
New Programs, or Funds Remaining for Existing Programs14	$109.5

TARP is on its way to failure:

A troubling discovery was made in May of 2009 when records obtained by Judicial Watch indicated that the executives of the so-called “Big Nine” – the first banks to receive TARP funds 15 – were in fact pressured into accepting the funds. In October 2008, then-Treasury Secretary Henry Paulson ordered nine banks, which the Treasury described as “healthy” financial institutions, to give ownership interests to the government or else face regulatory action forcing them to do so.

Meanwhile, financial institutions wishing to return their share of TARP funds have met with reluctance on the part of the Treasury Department to accept repayment of funds. When this report went to print only $70.4 billion of the given funds had been returned by only 32 companies.

That, coupled with recent comments made by Treasury Secretary Tim Geithner indicating that even re-paid funds could, and likely would, be re-disbursed under the TARP program with no end in sight III causes concern for taxpayers.

Painting doomsday scenarios, then-Treasury Secretary Henry Paulson and other proponents of the financial markets bailout package argued that passage was desperately required in order to prevent a massive collapse of the global financial system. However, even though Congress ultimately passed ESSA and the TARP was established, the stock market collapsed - evidently shareholders did not put any faith in the government’s actions.

Treasury’s acquisition of preferred non-voting shares through the Capital Purchase Program first raised the issue of “nationalization.” More recently the Obama Administration began floating the concept of converting these non-voting shares into common stock with full voting rights, with the potential of increasing the government’s reach into the institutions’ operations even further. In some instances, Treasury might have the majority of shares, allowing for the government to take full control of the institution. Such a scenario would be damaging to the economy as a whole as it would erode economic freedom and discourage domestic and foreign investment. It would further encourage risk-aversion and create “zombie banks,” institutions that have no real economic worth, but operate on funds from the government.

Critics have a point when they argue that such a conversion of non-voting shares to common stock would send the United States on its way to becoming a centrally planned economy. Meanwhile, while four entities were originally created to oversee TARP,IV several months into the program taxpayers have not been given a clear or complete picture of how the funds are being spent, as relevant data is dispersed over various agencies and in various formats, and disclosure of information directly to the public remains limited at best.

Interestingly, and in what appears to be the result of a realization that the American people are increasingly wary of the TARP, officials at Treasury are steering away from using the acronym “TARP” in their communications. Instead they are using the acronym for the underlying legislation EESA, as well as the term “Financial Stability Plan” – a program that was created in February by Timothy Geithner, in an effort to rebrand the financia lmarket bailout and make a rhetorical clean break from Henry Paulson and the Bush Administration.

The reasons behind the possible failure of TARP are suitably described by the Cato Institute’s Vern McKinley and Gary Gegenheimer: “Beyond the inconsistencies and implementation problems, financial institution bailout policy has been unwieldy, inequitable, extremely costly, disruptive, and lacking in transparency and oversight.”16

However, even if TARP were to be discontinued in the near future, as lawmakers are pushing to prevent the further use of repaid TARP funds,V taxpayers have every reason to be concerned about the fallout from the bailout package. Already, members of Congress are floating bills to re-regulate the industry, failing to acknowledge that the financial crisis was not triggered by a lackof regulation.17

In June 2009 President Obama unveiled what he described as a “sweeping overhaul” of the rules governing the financial system. Indeed, it is “sweeping” but misguided at best.

These are the key elements of the plan:

it would give the Federal Reserve extensive powers to oversee and regulate large firms, such as insurance companies, that are deemed “too big to fail” – in short it means that U.S. officials would have the authority to seize and dismantle these companies whenever they please (with the supposed purpose of “saving” the financial market);
it would create a new bureaucracy, the Consumer Financial Protection Agency, that would have authority to enact new rules over credit cards, mortgages and other consumer products, which could be a big intrusion of the government into private banking;
it would set up another institution, the Financial Services Oversight Council, headed by the Treasury Secretary, which would extend financial regulations well beyond the reasonable level.

President Obama’s plan is the most extensive revision of the financial regulatory system since the 1930s and will pose a great threat to the free market by threatening private financial institutions.

Effects on COGD:

For our calculations, we are assuming the full expenditure of the $700 billion in TARP funds in 2009.VI Based on this assumption, had Congress not passed the package, COGD would fall on July 25. That means that the COGD would be later in the year by only nine days in comparison to 2008 estimates.

III The Congress of the U.S., Senate Banking Committee hearing, May 20, 2009: Senator DeMint: ‘So your understanding of what we did is that the Treasury now has $700 billion that it can use permanently, rotating in and out of the capital markets as you see fit?’ Secretary Geithner: ‘Well, I'm not quite sure permanent, but you're right.’
IV Congressional Oversight Panel (COP) - established as a legislative branch body to help provide broad oversight of financial markets and regulatory system; Financial Stability Oversight Board (FinSOB) – its purpose is to review Treasury’s exercise of authority, including the appointment of financial agents, assets to be purchased, and the structure of tools used to purchase troubled assets;
Special Inspector General for TARP (SIGTARP) – its responsibilities includes conducting audits and investigations of purchase, management and sale of TARP assets;
Government Accountability Office (GAO) - every 60 days, the U.S. Comptroller General is required to monitor the performance and report on a variety of areas associated with oversight of TARP.
V On June 8, 2009, Rep. Jeb Hensarling introduced a bill that would set a December 31 deadline for the Treasury Department to use TARP funds.
VI Under the original EESA legislation, the Treasury’s authority to enter into agreements to purchase assets under TARP is set to expire on December 31, 2009.

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