In 2008, at the brink of the subprime meltdown, President George W. Bush signed in to law a highly controversial bill that provided help to struggling banks who looked to be destined for bankruptcy. Not only did the Troubled Asset Relief Program (TARP) provide aid to the banks, but it was that bill that gave America a new political buzzword: bailout.
TUTORIAL: Credit Crisis
Americans saw a price tag of $700 billion and immediately associated this figure with money lost. Each American citizen would contribute about $2,200 to a fund that would bailout greedy banks. Even today, especially during an election season, TARP has become an American poster child for corporate greed. Is it entirely accurate for Americans to hold such a grudge for TARP? Possibly not. Let's take a look at TARP three years later. (For a look at past government interventions in the market, read Top 6 U.S. Government Financial Bailouts.)
Not Even Close to $700 Billion
Although TARP was authorized for $700 billion, the price tag never came close to it. According to the Congressional Budget Office (CBO), in March of 2011, $432 of the $700 billion has been disbursed. Although there will be further payments, they are minute compared to the intended amount.
It Was Supposed to Cost $300 Billion
Seven hundred billion wouldn't have been as hard for American taxpayers to swallow if they were going to get it all back. From the beginning, TARP was intended to be an investment by the U.S. Treasury, but large-scale losses were worked into the figure. Original estimates forecasted tax payers losing $300 billion, but three years later the program is on track to beat those estimates.
The CBO, in its March 2011 report, found that the estimated loss was only $19 billion while other independent estimates forecast that TARP may cost nothing at all. The actual losses are largely dependent on the future growth of the investment markets and how they affect the value of the warrants and common stock positions still held by the Treasury.
Of the $245 billion invested into the banks, $169 billion, or 68%, has been paid back with interest. Wells Fargo held its TARP money for 14 months before paying it back. In those 14 months, they paid the Treasury $132 million in dividend payments. Because the Treasury requires an equity stake in the form of preferred stock, warrants or senior debt securities, all companies receiving TARP money have to pay it back with interest or dividend payments.
Most of the other banks, including Bank of America, JP Morgan Chase, Goldman Sachs and American Express have paid the Treasury in full.
The Auto Industry
To date, Chrysler has paid back $10.6 billion of the $12.5 billion that it borrowed. General Motors has paid $8.1 billion of the total $13.4 billion. Of the $80 billion borrowed in total, only $29 billion has been repaid. So far, it appears that it is the auto industry, not the banks, who may deserve the brunt of the taxpayer wrath.
The Bottom Line
Although some of the outstanding funds will never be paid back, the CBO believes that most of it will. Once dividends, capital appreciation on the warrants and stock appreciation is factored in at future market prices, TARP may end up being a program that provided needed assistance that resulted in a large amount of American jobs saved. (For additional reading, check out How The U.S. Government Formulates Monetary Policy.)