Considering the effectiveness in easing credit and capital market pressure and restoring confidence in the financial system as well as a near 99% recovery of the injected money at a lower-than-expected cost, there is no doubt that the Troubled Asset Relief Program (TARP) is a success story. However, will this become a bad habit for big bailed out institutions?
The unclear goals of the program strengthened the perception that some big institutions are “too big to fail”, the Congressional Oversight Panel of $700 billion TARP said in its final assessment report earlier this week.
Precisely, the lack of articulation has probably created a malformed impression that Federal Reserve will always protect these institutions from failing if they are at major financial trouble. Quite obviously, if the big institutions get the idea that a big shot will be there to save them whenever they are in dire straits, they will never hesitate to take extravagant risks. Unfortunately, taxpayers will have to suffer by bearing the cost if these institutions lose the gamble.
On the other hand, big institutions should not have the perception that they would get taxpayers’ assistance in future if they dig their own hole and the Dodd-Frank act clearly conveys this message, Timothy Massad, the Treasury official in charge of the bailout program said.
The Success Story in Brief
After functioning for two years, TARP expired in October 2010. While most of the major financial institutions have cleared their TARP dues, many banks are still to repay their bailout loans. However, with the $475 million repayment by six more banks on Wednesday, the Treasury almost reached the break-even level.
The program not only helped in stabilizing the economy, it actually did so at a lower-than-expected cost to taxpayers. According to the Congressional Budget Office’s (CBO) estimate, the cost related to TARP will drop to $25 billion from $28 billion estimated in the President’s 2012 fiscal year budget.The present estimate by CBO is a giganticdrop from the Treasury’s initial estimate of $350 billion.
The assistance to American International Group (AIG), support to automakers and efforts to prevent foreclosures remain on the costs side of the ledger. However, these costs might offset the extra recovery from the participating banks. Together, these actions are expected to leave a $45 billion dent in the program. However, a net gain of $20 billion is expected from other transactions, not to forget reimbursements that are yet to come.
TARP: A Biased Program?
Though the primary intension of TARP was economic salvage, it was clearly biased toward the mega institutions. Of the total amount, about $209 billion was injected into 18 large financial institutions, which were about to collapse due to their awfully risky activities.
Also, according to the watchdog panel report, credit rating agencies were biased. The credit ratings of large financial institutions were adjusted by the rating agencies to reflect that these institutions were backed by government guarantee. However, no such manipulation was made for smaller institutions, making borrowing more expensive for them compared with the larger names.
Auto Aid in Question
The watchdog panel report said that the Treasury failed to lay out clear goals to bail out automakers. Of the total $85 billion provided to automakers, the majority was absorbed by General Motors Co. (GM). But the automaker failed to save itself and went bankrupt soon after. General Motors is still struggling to clear off its dues in full.
Another major bailed out company, Chrysler Group was acquired by Italy’s Fiat S.p.A. So, it’s hard to conclude whether bailing out automakers is a success or a failure. Again, the “too big to fail” perception may also encourage GM to wager more keeping taxpayers as back up.
TARP Funds Gone Abroad?
In the second half of last year, the watchdog panel criticized the structure of TARP. The panel slammed that foreign companies got greater benefits from the U.S. bailout program than domestic companies realized from other countries’ bailout programs.
Many of the major financial institutions including Morgan Stanley (MS), Bank of America (BAC), JPMorgan Chase & Co. (JPM) have substantial overseas operations. As a result, the rescue funds indirectly helped financial institutions based in France, Germany, Canada, Great Britain and Switzerland.
Though the government’s efforts finally helped steadied the tottering financial system, it would have cost taxpayers less if the government could keep the fund within the country.
TARP: Boon or Bane?
The watchdog panel’s criticism is acceptable, but we cannot deny the usefulness of the program. Although the U.S. financial institutions are still grappling with weak revenue, diminishing loan demand and low liquidity challenges, it is now comparatively stable with financial support from TARP.
Most importantly, all the economic indicators reflect that the worst of the financial crisis is now behind us. This was not a magic or miracle, but a last ditch effort in the form of TARP.
However, the Treasury should clearly convey the message to large institutions that this is not going to be a regular practice. If they forget the past and indulge in risks, they should very well save themselves from insolvency and collapse.
In conclusion, criticisms usually help to improve. As long as the government is careful about resisting big institutions from excessive risk taking with its policies and rules, there is no question of a greater systemic threat arising again.
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