You might remember the Troubled Asset Relief Program, well known as TARP, but in case the terrifying days of the 2008 and 2009 Great Recession are no longer fresh in your mind, let's take a look back. In 2008, we had all been introduced to financial terms that were once foreign to us. The average consumer knew nothing of subprime mortgages, mortgage backed securities or toxic assets, and they didn't realize that the housing market had ballooned to valuations unsustainable.
2008 and Beyond
Each day we were hearing about another large bank that was drowning in its toxic assets. These were often assets that were mortgage backed and were losing a substantial amount of value at an unprecedented rate. Virtually overnight, huge banks that made up a large part of the American financial system were at risk of declaring bankruptcy - something that could turn already catastrophic events into something worse. Many feared a depression equal or worse than the Great Depression of 1929 could be triggered.
In October 2008, as part of the Emergency Economic Stabilization Act of 2008, the Troubled Asset Relief Program was born, and $700 billion was pledged to buy toxic assets from the troubled banks in order to shore up their balance sheets and give them a chance to weather the storm and recover.
Proponents of TARP believed that letting these institutions fail could cause a complete financial collapse. Opponents of TARP believed that no institution should be too big to fail and there were millions of small businesses, and countless citizens, who could use a bailout as well. It was argued that throwing away $700 billion was an irresponsible use of taxpayer money.
In the end, $432 billion of the original allotted $700 billion was lent. The big question is, was the money lost, as many believed would be the fate of TARP? Although taxpayers will likely not recoup all of the funds, it appears that the program will be far more cost effective than originally thought.
Prior to 2008, Goldman Sachs was hardly a household name, but on Wall Street this investment bank is arguably the most powerful non-government bank in the world. Nobody thought that a bank of this size could be brought down, almost overnight. It happened, however, and along with an investment by Warren Buffett, Goldman Sachs received $10 billion in TARP funds. Using funds raised from a $5 billion stock offering, Goldman Sachs paid back TARP funds less than one year later, but in the end, tax payers made $1.4 billion.
Although competitors, Morgan Stanley and Goldman Sachs have a nearly identical history. Each found themselves holding such a large amount of toxic assets that their survival was in question. The government had to do something to restore confidence in the financial system and hopefully thaw out credit markets. Using the TARP program, the government lent Morgan Stanley $10 billion. Those funds were later paid back, netting tax payers $1.3 billion in profits.
Popular credit card company American Express applied for $3.9 billion in government bailout funds, making it the ninth largest investment for the TARP program. An American Express spokesman said, "Treasury's investment will help bolster our capital position in an uncertain economic environment," but the company later paid back the taxpayer's investment and, like other TARP institutions, paid dividends and issued preferred shares. This helped to produce a profit of $414 million.
It wasn't only the "too big to fail" banks that received TARP funds. Numerous smaller banks were authorized to receive TARP funds under similar terms as the large banks. Many of these small banks have repaid TARP funds, netting the treasury a profit of $35 million.
The Bottom Line
New estimates show that the TARP program may show a profit of $23.6 billion over the life of the bailout program, but some lawmakers believe that claiming victory is premature, since there are still outstanding loans. Others say that if the government does end up in the black, the profit could have been much larger if more aggressive deals were reached with the financial institutions receiving funds.
Still, if the government ends up recouping all of the funds, it will be difficult to argue that TARP was hardly the financial disaster that some politicians believed it would be.