As big banks have repaid TARP loans in the past few years, it's become commonplace for government officials and certain pundits to tout the "profits" taxpayers made on the hugely controversial program.
Even back in 2009, just a year after the program was launched, the Treasury Department started spinning stories about the profits accruing to taxpayers as banks began repaying their TARP loans.
Secretary Tim Geithner has played an active role in this effort, including last March when he declared: "While our overriding objective with TARP was to break the back of the financial crisis and save American jobs, the fact that our investment in banks has also delivered a significant profit for taxpayers is a welcome development." (Italics added)
The problem is this whole mantra about TARP "profits" is dead wrong, according to Christy Romero, the newly installed special inspector general for TARP.
"It is a widely held misconception that TARP will make a profit," Romero writes in her quarterly report to Congress.
Similar to her predecessor Neil Barofsky, Romero seems to be saying (indirectly, of course!) the Treasury Department -- and Geithner -- have been misleading the American public about the costs of TARP. While that's impossible to prove, there has been a concerted effort by Treasury to paint the program in the best possible light. (Reason.com has compiled a timeline of such statements, for those who want to check the record.)
My feeling all along is that Treasury has been cherry-picking the TARP data, focusing on the repayments vs. the loans still outstanding, much less the "soft" cost of the bailouts. It's like an investor who only talks about the stocks that have produced profits, ignoring the ones with losses.
Politico.com's Ben White reports on a Treasury response to Romero's report that seeks to dismiss the findings without actually addressing them.
"We've addressed each of these specific claims in old [special inspector general for TARP] reports. That said, it's important to step back and remember the size of the financial shock that hit in 2008 and just how close we came to a second Great Depression," a Treasury official tells White. "We still have a lot more work ahead to fully repair the terrible damage caused by the crisis ... but the government's emergency response was essential to preventing a meltdown of the entire global economy. And now we're winding down those programs faster and at a much lower cost than virtually anyone had anticipated during the dark days of the crisis."
There is a case to be made that TARP -- however flawed and badly managed by then-Treasury Secretary Hank Paulson -- was a necessary evil that helped prevent the financial system from totally collapsing, as Henry and I discuss in the accompanying video.
But there's a big difference between "a much lower cost" and the "significant profit" Geithner has touted, and government officials are compounding the "original sin" of TARP by pretending otherwise.
TARP 'Costs and Legacies'
The Congressional Budget Office estimates TARP will ultimately cost $34 billion, based on future expected payments. But Romero notes banks and financial institutions still owe $118.5 billion in TARP funds. Her estimate includes the government's ongoing stakes in companies like Ally Financial, AIG and General Motors, as well as $4.2 billion Treasury had written off and realized losses of $9.8 billion "that taxpayers will never get back."
The bigger issues is that "TARP's costs and legacies involve far more than just dollars and cents," Romero writes. "An analysis should not be focused alone on money in and money out."
Indeed, these "legacies" include the moral hazard engendered by the $700 billion bailout, which solidified the idea that some banks are "too big to fail."
"A recent working paper from Federal Reserve economists confirms that TARP encouraged high-risk behavior by insulating the risk takers from the consequences of failure -- which is known as moral hazard," Romero writes.
Moral hazard may be hard to prove -- it's like Supreme Court Justice Stewart's famous saying about pornography. But what's undeniable is the big banks got bigger in the aftermath of TARP: The five-largest U.S. banks now control 52% of the industry's assets, up from 26% in the early 1990s, according to the Dallas Fed.
Meanwhile, around 350 small banks face a "significant challenge" in repaying about $15 billion in outstanding TARP loans, in part because they lack access to the capital markets, according to Romero. "The status of those banks is one of the major issues facing TARP nearly four years after the financial crisis."
If and when those banks default on their loans, there will be a cost to taxpayers, be it in the form of a hit to the FDIC insurance fund or further concentration of bank assets as regulators force failing firms to merge with larger ones.
Concentration of bank assets is but one of the "profound long-term consequences" of TARP cited by Romero. Others include "the impact on consumers and homeowners from the large banks' failure to lend TARP funds," which in turn spurned a huge backlash against corporations generally and got millions of ordinary Americans riled up about the cozy relationship between Wall Street and Washington D.C. (There's also the cost of the Fed's zero interest rate policy and the government's unlimited pledge to support Fannie Mae and Freddie Mac, among other bailouts.)
Arguably, TARP helped animate both the Tea Party and Occupy Wall Street movements and generally reaffirmed Americans' loss of faith in our institutions and elected officials. These developments have long-term societal implications that go far beyond any quantitative analysis of the "cost" of the bailouts.