Inspector General report ends myth that TARP 'turned a profit'

Did TARP save America from economic catastrophe? We hear a lot of counterfactual arguments and economic theories on the matter. Politicians, naturally, have definitive answers. The public, though, is left to focus on three questions that now matter: Was the money paid back? Did TARP turn a profit? Did the legislation stabilize the long-term health of the economy?

A new report to congress by Christy Romero, the Special Inspector General for the Troubled Asset Relief Program, says “no” on all fronts. Though the report asserts that TARP played an “active” role in the recovery (some of you may surely wonder “what recovery?”), it ends the myth that taxpayers turned a “profit” or were paid back by borrowers.

How could this be? It was only in March when Treasury Secretary Tim Geithner claimed that while the “overriding objective” of TARP “was to break the back of the financial crisis” and save jobs, “the fact that our investment in banks has also delivered a significant profit for taxpayers is a welcome development.”

Similarly, after the first-round of bank re-payments, President Barack Obama maintained that “the government has actually turned a profit.”

Americans may be astonished to hear that our debt-ridden government has the capacity to turn a “profit” – a significant profit, even — on taxpayer-funded emergency “investments.” After all, if TARP is a win-win policy that generates revenue, why doesn’t government pour hundreds of billions of dollars into failing companies and troubled banks every year?

The White House asserts that it will create $179 billion in profit by the fiscal year 2015. How does government make a profit, exactly? Well, the Federal Reserve undergoes a couple of rounds of quantitative easing (QE1, QE2 — and maybe another sequel), buying Treasury bills and distressed mortgage-backed securities – or, in laymen’s terms, it prints money. Then it takes the interest made off that printed money and deems it profit. 

Even using this brand of inventive accounting, the report notes it is a “widely held misconception that TARP” is generating profit. “The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost),” the report calculates.

Though its tricky to track $700 billion of emergency funding that was haphazardly dropped into the economy by a panic-stricken government, when accounting for the Fannie Mae and Freddie Mac bailout, the American taxpayer is probably owed somewhere in neighborhood of $237.7 billion, though some estimates are far higher. And it will be more. The Treasury Department says that a large part of the money lost via TARP is the result of the housing and car bailouts, also not paid back. When the next Fannie and Freddie rescue comes – as a number of reports have indicated will be needed – taxpayers will be on the hook. 

And let’s not forget that many of the banks, and auto companies, had conveniently paid back their government bailouts using other government bailouts.

The report also makes the case that TARP may be perpetuating future financial misadventures and bailouts. The issue is moral hazard – how companies embrace undue risks knowing full well they won’t be held accountable.

Most of the banks that were “too big to fail” when TARP was implemented are now even bigger.  The report to Congress points out that 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.”

Risk a key component of capitalism. Government-backed risk is no risk at all.