“The TARP is not ended by [the Dodd-Frank Act]…[t]here is some money left unobligated and I intend to press for effective programs to aid people; for instance, those who are unemployed.”
—Representative Barney Frank, June 29, 2010
October 3, 2010, marked the expiration of the Treasury Department’s statutory authority for using funds authorized under the $700 billion Troubled Asset Relief Program (TARP) bailout. The Congressional Budget Office’s latest estimates suggest taxpayers will lose $66 billion. The reality is that the TARP bailouts and massive taxpayer liabilities continue to exist in the federal government’s control of GM, Chrysler, and AIG, as well as the capital infusions into smaller banks that are now struggling to repay the taxpayers. As Representative Jeb Hensarling (R-TX) noted in a recent op-ed published in Investor’s Business Daily, “Currently, Treasury has committed $460 billion in signed contracts and only $199 billion of the $386 billion actually paid out has been repaid. There's no obligation that the outstanding money be repaid to taxpayers in a timely manner.” Perhaps more damaging, the notion created by TARP that some financial institutions are “too big to fail” was codified by Dodd-Frank and will live on well into the future.
Additionally, though not directly part of the TARP, the government takeover of mortgage giants Fannie Mae and Freddie Mac, estimated to cost the taxpayers nearly $400 billion, continues to wreak havoc on our financial system and holds back an economic recovery that could put Americans back to work. Democrats are preventing a true healing of the nation’s financial system by not eliminating these Government Sponsored Entities (GSEs) and ridding the taxpayers of the GSEs’ losses.
Issues of Concern
Failing by any measure: The TARP legislation specifically authorized the Treasury Secretary to use funds in such a manner that “protects home values, college funds, retirement accounts, and life savings; preserves homeownership and promotes jobs and economic growth; [and] maximizes overall returns to the taxpayers of the United States.” Today national home prices are down 28 percent since their peak, equity markets are down approximately 25 percent, and government efforts at foreclosure mitigation have failed. Since enactment of TARP, the uncertainty created by the federal government’s capricious involvement in the economy has caused the unemployment rate to remain above 9 percent for 17 consecutive months while GDP growth has limped along at only 1.7 percent for the 3rd Quarter of 2010. With statistics like these it is questionable how anyone could discuss TARP’s effectiveness with a straight face.
The biggest cost of all: By specifically targeting large firms, and in some cases forcing banks to accept government capital, TARP confirmed what markets perceived as an implicit government guarantee that some firms are “too big to fail.” This perception persists in markets today despite Democrats’ protestations to the opposite. The Congressional Oversight Panel’s September 2010 report assessing TARP concluded, “[T]he program’s moral hazard costs were much greater than necessary.” Panel member Mark McWatters stated, “[The guarantee] provides these large firms with a substantial cost advantage over their smaller, less systemically important competitors, which will lead to a more concentrated financial sector and higher prices paid by customers of banks and other financial companies.” Sadly, this dynamic appears to set the stage for a future financial crisis.
Bailouts come in many forms: According to the July 2010 report from the Special Inspector General for TARP (SIGTARP), “the current outstanding balance of overall federal support to the nation’s financial system, has actually increased more than 23 percent over the past year, from approximately $3.0 trillion to $3.7 trillion.” This number is due largely to Democrat decisions to allow unlimited taxpayer support for the loss-making Fannie Mae and Freddie Mac. The Congressional Oversight Panel, then chaired by Elizabeth Warren, currently special advisor to President Obama, noted: “By first making explicit the federal support for these GSE securities and subsequently buying up to $1.25 trillion of the same securities, Treasury and the Federal Reserve have effectively provided substantial economic benefit to the TARP-assisted banks that goes well beyond the amounts reflected in the accounting for the TARP itself.”