Dec 14 2009

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“The Transformation of TARP”

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  • TARP is a four letter word, both obvious and understood.
  • The Troubled Assets Relief Program (TARP) was also a dramatic response to an unprecedented economic crisis that unraveled at frightening speed in a cascade of spectacular financial failures for institutions at the heart of the US economic system, and key to global prosperity.
  • Addressing the nation on September 24th, President Bush put it succinctly, “I’m a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances.” In proposing the then unprecedented $700 billion spending bill, Bush noted that as difficult as it was to use taxpayer money, it was his expectation that most if not all of the money would eventually be paid back to the taxpayers, justifying the original expense to collectively prevent financial collapse.1
  • Democrats and liberals complained about the TARP solution, of course. Can anyone forget Nancy Pelosi’s partisan screed on the House floor that doomed the first vote on TARP and cascaded into a 777 point drop in the stock market on the same day? The worst point drop stock market history? The very idea of bailing out “fat cat” bankers was noxious to social justice Democrats.
  • But stripped of its intended purpose, TARP was the ideological god-child of even the most liberal members; a precedent- shattering intervention by the federal government in the operations of the private sector, providing support in return for control from Washington. And the delicious irony was that the program had been proposed and supported – even begged according to eye witnesses – by a Republican administration.
  • It was this new, emerging power paradigm that Republican legislators saw first, and which divided Republicans, between principle and pragmatism. For if the federal government could incur such frightening amounts of debt, so quickly, for such opaque purposes without assurance, what was the moral hazard from it doing so again?  35 days before an election, it brought into stark relief the question of what, if anything, the Republicans stood for.
  • TARP passed, cash flowed to the banks, and a simmering anxious and frustrated polity threw Republicans completely out of power for the first time since another Bush had sat in the White House.
  • Seething and second guessing about TARP has continued across the political spectrum since, but has most animated conservatives.
  • Conservative pundits and thought leaders have been unrelenting in their criticism of TARP, seeing in its passage as key to election losses and as an example of unprincipled Republican leadership. Not unlike liberals who cared to look closer, conservatives saw a template for the ominous federal spending and ubiquitous personal and business intrusions that have been the basis the Obama administration’s domestic policy in the TARP approval.
  • And in one very concrete way, they are correct. Created amid unprecedented urgency, bypassing normal legislative protocols of hearing, debate and amendment, TARP came with a then-prodigious price tag and murky objectives and truly astonishing levels of federal control.
  • One need only look at the Obama Stimulus bill, approved only four months later, which passed by the same criteria, with only  a larger sum.
  • “Urgency government” with spectacular price tags, backroom deals and massive government interventions has substituted for thoughtful and common sense legislating and process. We have seen this replicated in Obama efforts in financial reform, health care and Cap N’ Trade.
  • But in reviewing the results of TARP, critics and opponents have been wrong. And admitting this wrong is imperative right now. This story of the distinctive and targeted successes of TARP must be told before it is undermined by Obama efforts to turn the program into a revolving fund of additional, wasteful spending.
  • Far from wasting taxpayer funds, TARP effectively saved the banking system in late 2008, and despite the ongoing recession, is on the road to recapturing most of its investment – with interest. Consider the facts:
    • According to the Department of the Treasury, as of September 30, 2009 (the end of the government’s fiscal year) TARP had disbursed $364 billion of the authorized $700 billion, or about 52% of the authorized amount.2
    • During the fiscal year, financial institutions paid back $73 billion of the disbursements. Additionally, investments in these financial institutions resulted in the USG receiving an additional $12.7 billion in cash through interest or dividends.3
    • On December 10th, Bank of America repaid $45 billion in outstanding TARP monies, ending its participation in the program and bringing the total TARP repayments for the calendar year to $118 billion.4
  • In addition, Citibank is negotiating with the USG to pay back the non-invested portion of its TARP funds – $20 billion – by early next year, as is Wells Fargo5 with its $25 billion TARP debt.  This brings the potential repayments, without interest, to $173 billion, or nearly 50% of disbursed monies.
  • As we wait for additional actions by TARP recipients, it should be comforting to taxpayers that the Treasury estimates the value of shares it holds in financial firms is $9 billion more than has been invested, meaning the taxpayer is holdingprofit through TARP.6
  • Not all subdivisions of TARP are doing as well as the bank focused programs, for which it was originally intended.
  • For instance, $43 billion is still due and owing from AIG, with repayment potential looking grim. In addition, the Obama-expanded Automotive Industry Financing program, which funded Administration efforts to abuse shareholder rights in auto company bankruptcies and whimsically provide union equity stakes in the car companies, is $74 billion in the hole out of $76 billion disbursed.
  • And ominously, the Obama administration created the Home Affordability Modification program within TARP, and has so far dedicated $27 billion to this effort, out of a projected $50 billion commitment.
  • There is no expectation of repayment on this program.
  • And that is where we have the fault line.
  • After a year of generalization and recrimination, the narrative of TARP’s $700 billion is that of “lost” money, irresponsibly given away by politicians to robber barons, never to be recovered by the taxpayer.
  • The truth is that only a little more than half of the authorized funds have been used, and by January 2010, it is possible that half of that total will have been repaid to the Treasury with interest.
  • In its mission to restore stability to the financial system to prevent a catastrophic failure, TARP has been a success. That the taxpayers are actually seeing repayments of those funds that made liquidity and stability possible – with interest – is nothing short of astonishing.  It is also a solid vindication for those in the Bush administration and Congress who created, negotiated and implemented it.
  • Now, the time has come to slowly collapse the program, continue to collect payments, and use the funds to reduce the deficit. But this is not the Obama plan.
  • In a speech on December 8, 2009, President Obama sketched a different future for TARP. The President said, “TARP is expected to cost the taxpayers at least $200 billion less than what was anticipated just this past summer. So this gives us a chance…to shift funds that would have gone to help the banks on Wall Street to help create jobs on Main Street…”7
  • If it needs to be made any clearer, Team Obama plans to use remaining TARP monies and authorities as revolving stimulus fund; using hard earned money to chase the wasted $787 billion approved by Congress in February, doubling down on bad policy that has seen 4 million more Americans unemployed, with more each week.
  • This is madness.
  • Conservatives and opponents need to do two things. First, own up to their short sightedness on TARP.
  • Necessity is the mother of invention and TARP comes as close as anything so far conceived that represents a massive government intervention in the private sector under the rubric of conservative principles; an emergency government program, paid back with interest.
  • Distinguishing TARP from Obama’s wealth and power transfer policies is the only way to prevent the transformation of a worthy government program that served its purpose from becoming a slush fund for waste, fraud and abuse.

1. www.whitehouse.gov – Presidential Address – 9-24-08

2. Department of Treasury Press Release, 12/10/09

3. Ibid

4. CNBC News 12/10/09

5. Bloomberg 12/9/09

6. Department of Treasury – Office of Financial Stability – Overview & Analysis of TARP 12/09

7. www.whitehousse.gov – Office of the Press Secretary 12-8-09



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