Has the Government Made Money on TARP?
One of the ideas (btw I refuse on principle to ever use the word “meme”) bouncing around the geeconosphere is that the government has made money on TARP. For example, Brad DeLong says his prediction on this looks to be coming true (though in fairness he has not yet claimed victory), and I know I’ve seen other people talking about it. (It would not stun me if one of them were Tyler Cowen, but I don’t feel like wading through all his pro-TARP stuff again right now to look.)
But if you go and read the details to see what the buzz is about, you realize it’s not a slum dunk at all. The Capital Purchase Program (CPP) arm of TARP made $204.4 billion of “investments.” It’s true, the CPP earned great returns on some of these choices. “For the 22 companies that have bought back shares and warrants, the taxpayer received an annualized return of 17.5 percent—better than most hedge funds have done lately.” But then the article goes on to say:
Since many of the largest financial institutions have left the program, the 37 “exits” represent 34 percent of the total cash initially disbursed. The bottom line: taxpayers have received $70.3 billion in principal, plus about $10 billion in dividends and warrant payments.
Thus, even on its own terms, the pro-TARP case can say that the strongest 34% of the initial portfolio has earned a locked-in return of 17.5%. (Note that I believe this figure ignores the paper gain the government made on its Citi common stocks.)
OK, that’s pretty good, but what about the other 66% of the original portfolio of loans? To its credit, the Newsweek article notes this problem of “adverse selection,” wherein we obviously would see the healthiest companies paying back their TARP loans. In addition to that problem, there are other aspects of TARP falling outside the CPP:
Some components, like the $22 billion pledged to help banks modify mortgages, weren’t intended to produce a financial return. Other efforts, like $79 billion in loans to automakers, and nearly $70 billion made available to AIG, are less likely to yield returns.
But for those of us who initially predicted that the TARP would be a big money-loser, we really shouldn’t feel embarrassed even if this thing ends up making money, or if (far more plausible) the CPP component turns a profit. There are two main reasons:
(1) The Fed bailouts indirectly helped some of the TARP recipients, which we didn’t know at the time (or at least, we didn’t have all the details at the time). For example, of the $85 billion that the Fed injected into AIG on the day of its takeover, AIG turned around and wrote checks to Goldman for $13 billion. (Goldman paid back its TARP money early on, as soon as the government began using TARP as a means of limiting executive pay.) See EPJ for a similar take on the government’s profits from TARP.
(2) The strongest recipients of the TARP loans were forced to take them. When I predicted that the government would lose money on TARP, it was because I foolishly believed the program would be, well, a Troubled Asset Relief Program. So my reasoning went like this: If private buyers think an asset (such as a mortgage-backed security) is worth $x billion, and the government pays $y billion for it, where y > x, then the government is probably going to lose money on it.
Now if instead, private investors were given the option of forcing any big bank of their choosing, to (a) take a loan, (b) give preferred stock and warrants for it, and (c) allow the lender to dictate whether the banks’ executives could fly private jets and how much their bonuses could be, until the “loan” were paid back at a very healthy rate of return, then I think plenty of private investors would have been able to cook up a few “profitable” loans under these conditions.
Nobody says the IRS turned a profit last year, even though it took in a heckuva lot more revenue than it paid out to employees and utility companies. In many respects, that’s just how Paulson and Bernanke made their money.
