R.I.P., TARP

Exactly two years after it was enacted, the government’s reviled Troubled Asset Relief Program [TARP] will die Sunday -- or, in technical terms, lose its legal authority to enter into new obligations -- as mandated by the 2008 TARP law.   

While it is widely credited with helping prevent a second Great Depression, TARP became despised by voters as a symbol of out-of-control government spending, and after rescued banks resumed paying top employees big bonuses while the nation struggled with a weak economy. The $700 billion bank bailout still could cost some politicians their jobs in the Congressional mid-term elections in five weeks; two Senate Republicans who voted for TARP in 2008 lost primary challenges earlier this year.

But TARP is getting a good financial eulogy: At one time, government analysts projected taxpayers could lose more than $300 billion on TARP. On Thursday, however, the Obama Administration announced the final cost likely would be much less.

“I think right now, the briefing that the President got had that number at under $50 billion,” White House press secretary Robert Gibbs told reporters Thursday after President Obama’s daily meeting  with his economic team. “And I think that number is likely only to improve.”

Supporters credit TARP’s financial turnaround to unexpectedly stronger repayments by many bank recipients. More than $25 billion in interest, dividend and other extra proceeds helped, too.

“We’ve gotten almost all the money back that we put into the banks and we’ve gotten it back with interest,” said Sen. Judd Gregg (R-N.H.), who voted for TARP. “This is the first federal program that I can remember where the taxpayers actually made money. Not only did they make money, but it did what it was supposed to do.”

TARP received a boost Thursday from insurance giant AIG (NYSE:AIG), which got government bailout valued at $180 billion. The company announced an agreement-in-principal with the Treasury Department to repay “all its obligations to American taxpayers” in a complex restructuring plan that will take a year or more to play out. The AIG rescue included about $70 billion in TARP funds--including $22 billion the company drew down Thursday. 

“If the common stock the American government holds in AIG were sold today, that investment would net the federal government $20 billion,” Gibbs said.

But not all observers are cheering TARP’s legal demise.

“One of the goals was to help restore lending, and that didn’t happen,” said Neil Barofsky, the special inspector general of TARP.

The Bush Administration, facing a meltdown of the financial system in fall 2008, created TARP. Within a year, it committed more than $500 billion in more than 700 financial firms, including most of the nation’s largest banks and Wall Street companies.

Any final taxpayer losses in TARP, which may take years realize, likely will be suffered in the auto and housing programs, analysts say. 

But some 600 banks -- including several large ones like SunTrust (NYSE:STI) and Regions Financial (NYSE:RF) -- still owe the Treasury about $65 billion in TARP funds. And in August, 123 banks missed mandatory dividend payments to Treasury, about $45 million in total.

“It’s a little early to write the obituary on TARP,” Barofsky said. “Although Treasury’s ability to spend new money stops on October 3rd, these programs are ongoing and hundreds of billions of taxpayer dollars are definitely still out there.”

Through its Office of Financial Stability, the Treasury will oversee TARP programs that have been allocated all of their final funding and continue to operate past Sunday, such as its mortgage programs. It will also manage outstanding TARP investments.  

As part of the Dodd-Frank financial regulation reform bill it passed in July, Congress shut down most of TARP, forbidding Treasury from launching any new TARP initiatives. And, in a political gesture designed to appease angry voters, Congress reduced TARP’s legal spending authority to $475 billion, though still well above the level needed to continue operating existing programs. 

In likely its final commitment in TARP, the Treasury announced Thursday it invested $570 million of TARP funds in 84 community development financial institutions, which are firms that target at least 60% of their lending and other economic development activities in areas underserved by traditional banks.

You can read the Treasury’s latest monthly report on the TARP, for August, here: http://www.financialstability.gov/docs/105CongressionalReports/August%202010%20105%28a%29%20Report_final_9%2010%2010.pdf