All The Carp About The Tarp

Jackie Calmes at the Boston Globe:

The Treasury Department expects to recover all but $42 billion of the $370 billion it loaned to ailing companies during the financial crisis last year, with the portion loaned to banks showing a slight profit, according to a Treasury report.

The latest assessment of the bailout program, provided by two Treasury officials yesterday ahead of a report to Congress today, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. That estimate anticipated more bank crises.

The officials said the government could ultimately lose another $100 billion from the bailout program, if big banks need more loans or if the $700 billion TARP fund is extended to help small businesses or to avert home foreclosures.

Still, the new estimates could lower the administration’s deficit forecast for the current fiscal year, which began in October, to about $1.3 trillion, from $1.5 trillion.

The new estimates could make it easier for those in Congress who hope to use some of the TARP money to reduce joblessness and home foreclosures. They could tamp down some of the public anger that is roiling both parties as the midterm election approaches.

Matthew Yglesias:

Whatever else you may say about economic policy over the past 12 months, the fact of the matter is that the much-derided TARP program has been a big success. There was a fear that financial panic would lead the global economy into a downward spiral. That hasn’t happened. The developed world saw a sharp contraction from which we are now slowly rebounding, and the leading developing economies avoided recession altogether. Asset prices have stabilized. It’s been obscene to watch some of the very people who engineered this crisis back to earning so much money, but the correct response to that is better regulation and higher taxes in the service of more and better public services, not a backlash against a policy intervention that’s set the stage for economic recovery.

Best of all, as I’ve been noting for a while the true net cost of the program is much less than the gross $700 billion congressional appropriation. Today, the Treasury Department further revised downward its estimate of the actual net cost to taxpayers. Now there’s talk of using that extra cash as a pot with which to finance additional job creation measures. It’s a good idea.

The alternative proposal is to use the money to reduce the national debt. This is a bad idea. Borrowing money right now is cheap and easy. The real debt problem lies in the future. Policy changes that effect projected future debt levels, like comprehensive health care reform, are a good idea. But a one-off debt reduction in 2009 doesn’t do that. What we need to do to set the stage for a reasonable debt-reduction program over the long run is to return the country to its trend level of economic output.

Veronique de Rugy at The Corner:

I can see the Obama administration and Congress already salivating over the news that the Department of the Treasury now estimates that over the next ten years TARP will cost $141 billion at most. This number is down $200 billion from the $341 billion the White House projected in August.

But what to do with this $200 billion? Congress and the administration, of course, are thinking of spending the cash on a jobs bill. But that would be a terrible idea. First, while Secretary Geithner can use the TARP money as he sees fit, he still has to do it within the boundaries of the original legislation (no matter how fuzzy these are, they do exist).

Daniel Indiviglio at The Atlantic:

So really, this revision reflects a gross overestimate of how much banks would lose.

How bad was its estimate? Let’s take the $100 million for homeowners and future bailouts out of the equation. That means the loss estimate changed from around $241 billion to $42 billion. So the administration got it wrong by roughly 83%.

Yet, the world hasn’t fundamentally changed since August. In fact, I’d argue it’s changed very, very little. Banks are a little healthier, but even back in August they were clearly on the mend. And even if you think the world has changed more than I do, I highly doubt anyone thinks it’s changed by, well, 83%. Banks’ equity certain isn’t worth 83% more: JP Morgan is down 2.8%; Goldman Sachs is up 2.2%; Bank of America is down 0.9%; and Citi is up 5.2%. The S&P 500 is only up by 8.7% over that time period.

I suspect this new estimate is more politically significant than economically meaningful. Back in August, the administration probably had a purposely pessimistic estimate so that it would look better when it was eventually revised it in a positive direction. While the original estimate would likely be blamed on the Bush administration, the new estimate could be spun to reflect the progress made during the Obama administration.

Now, I worry the political winds might be blowing their loss projection in the opposite direction: this new estimate might be a little too optimistic. With all of the focus on the deficit, this new projection helps. It lowers the deficit estimate from $1.5 trillion to $1.3 trillion. This makes it politically easier for Washington to get a jobs-focused stimulus passed.

Maybe I’m a too cynical about Washington estimates, but I just can’t believe that a loss estimate should change by 83% in just four months without some earth-shaking change in the economy.

Stan Collender:

My numbers are admittedly much more optimistic than the official estimates, but a $200 billion reduction in the 2010 deficit could lower it to around $1 trillion, and possibly less.  A $1 trillion 2010 deficit would be $400 billion less than the $1.4 billion recorded in 2009.

But before anyone books this lower projected cost, let’s see whether any of the TARP funds are used for some type of jobs program and, therefore, the estimates change again.

Boyd Erman at Seeking Alpha:

This is a good-news, bad-news story for the administration.

Taxpayers want their money back, so that’s clearly the good news, and it also frees up money for other initiatives or even deficit reduction.

The bad news is it’s harder for the administration to push its hard line on long-term changes in the culture of banker pay when the industry is rapidly becoming less beholden to the government.

Last week saw Treasury Secretary Tim Geithner taking direct aim at what he sees as revisionist history in banking executive suites by reminding industry bosses — including those at Goldman Sachs Group Inc. — that in his mind no bank was safe during the worst of the crisis and that without government aid, any institution could have failed (even you, Goldman.)

If bankers have already forgotten how bad it was, the risk for government with TARP becoming less costly to the public purse is that taxpayers will too.

Donald Marron at Seeking Alpha:

Treasury Secretary Geithner has the ability to use TARP funds largely as he sees fit, as long as those uses are within the boundaries set out by the original legislation. As you may have noticed, the exact location of those boundaries–well, even the rough location of those boundaries–has been a topic of great debate during TARP’s existence. But the basic idea is that TARP can be used to purchase troubled assets, which the bill defines as follows:

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

If our leaders want to use TARP through executive action, they will have to come up with programs that fit within these limits. Additional support for small-business financing or home mortgages could certainly be structured to fit within these parameters; indeed, TARP already has programs for both of those. It would require substantial ingenuity, however, to figure out a way to support some of the other ideas being floated (e.g., aid to local governments).

New Legislation

The second approach would be for Congress to enact legislation that would increase spending on various programs and then pay for it, at least in part, by reducing the amount of money in the TARP program.

There have already been at least two pieces of legislation that have taken this approach:

  • The Helping Families Save Their Homes Act of 2009, signed by the President on May 20, 2009, reduced TARP’s maximum authority from $700 billion to $698.74 billion. CBO scored that $1.26 billion reduction in TARP authority as saving $630 million.
  • Last week, the House passed a bill that would create an improved database for tracking the TARP program. To pay for the database, the bill would roll back TARP authority by an additional $34 million (i.e., to roughly $698.71 billion). I haven’t seen an official score, but following the earlier example, I would expect that the reduction saves $17 million, which is presumably enough to pay for the database.

The key thing to note here is that each dollar of reduced TARP authority translates into only fifty cents of reduced spending. Why? Because TARP accounting is done using a “credit” approach, which accounts not only for the money that the government uses to purchase troubled assets, but also expectations of any money that will be returned.

The potential for returns varies greatly among the existing TARP programs. On average, the investments in banks seem likely to return most of the original investment, so the net cost of those investments will be relatively small. At the other extreme, the program supporting mortgage modifications will generate no returns. In scoring possible changes to TARP, CBO splits the difference and assumes that, on average, 50 cents of each TARP dollar will be repaid, and 50 cents will be added to the deficit.

UPDATE: David Frum at FrumForum

Advertisements

1 Comment

Filed under Economics, The Crisis

One response to “All The Carp About The Tarp

  1. Pingback: What We’ve Built Today « Around The Sphere

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s