The Troubled Asset Relief Program (TARP) was enacted by the U.S. Government in 2008 to provide struggling financial firms and key U.S. employers with cash to maintain solvency and avoid bankruptcy. To disburse this cash to the firms, the U.S. Treasury bought shares of preferred stock in the companies, as well as purchased toxic assets, such as mortgage-backed securities, off of the companies’ balance sheet. The total amount allocated to TARP was $700 billion, which is commonly misconceived as the actual price of the program. Many are under the misconception that the $700 billion was a sunk cost – U.S. taxpayer dollars that were spent, added to the U.S. national debt, and will never return. However, the fact of the matter is that in the end, the actual cost of the program will only amount to a fraction of the $700 billion originally budgeted.
The TARP dollars were distributed in the form of a loan or investment in the company being “bailed out,” and the U.S. government distributes those funds under the full expectation that the funds will be repaid and even a certain rate of return will be rewarded. For example, the $45 billion loaned to Bank of America as a part of the TARP program was repaid in late 2009. The $25 billion in preferred shares purchased by the U.S. Treasury in Wells Fargo yielded a $371 million dividend early last month.
Like any loan, some will default and the loaned funds will go unpaid. Of the $700 billion issued, some of the loans or investments will go south and go unpaid resulting in a loss; however, the actual cost of TARP – a fraction of $700 billion – versus the benefit – rescuing the U.S. economy and world financial system – was well worth it. Indeed, the Congressional Budget Office has issued a statement detailing the cost of TARP at $109 billion, a fraction of the original $700 billion. Considering the companies receiving TARP funds can be regarded as “risky” loans or investments, this cost is relatively low.
One’s stance on the bailout and the way the U.S. government has handled it aside, everyone should at minimum be clear as to how the program works, what its goals are, and what the true cost to U.S. taxpayers is. Hopefully this post has been successful in that regard.
I enjoyed reading your post. As someone who is very interested in politics, it is incredibly frustrating to see the gap between public awareness of what policies or candidates stand for and what the actuality is. A good example is John Kerry's comments regarding how he "voted for it before he voted against it." Most people take that to mean he flip-flopped because of how Republicans framed the debate - as this debate has similarly been framed in a negative light. But the reality is quite different - he voted for supporting a bill before it was amended in a manner he did not agree with and he retracted his support. A similar survey showed this effect also - regarding the current health care debate. Americans may be against it when openly asked if they agree with the current reform being considered, but when told what it does they show strong support. Your discussion of the actual price tag of the TARP funds, then, is incredibly relevant when we see people frown upon it considering it a costly act of self-indulgence for special interests but in all reality its been significantly less costly and if anything has been highly successful in some regards.
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