ByGary S. Corner
The Troubled Asset Relief Program (TARP) was created to stabilize the financial system during the financial crisis of 2008. Congress authorized $700 billion through the Emergency Economic Stabilization Act of 2008, and the program is overseen by the U.S. Department of the Treasury. TARP is generally seen as one of the federal government’s primary responses to the financial crisis.
While widely known for use in the bank Capital Purchase Program (CPP), TARP funds were also used to make loans and direct equity investments to select auto industry participants, backstop credit markets, provide a lifeline to the American International Group (AIG) and provide ongoing support for government housing initiatives.
The Treasury Department is actively exiting its remaining investments made under its CPP and auto industry and credit market programs and has already closed several other bank investment programs and its investment in AIG. It has not, however, taken specific actions to exit from its Community Development Capital Initiative. Moreover, the TARP housing program remains active with additional funding allocations. As of Sept. 30, $421 billion has been deployed through TARP, although existing obligations may raise the total to $457 billion. (See Table 1 below.)
|TARP initiatives||Treasury obligation (billions)||Disbursed||Outstanding investment balance (billions)||Estimated lifetime gain (loss) (billions)|
|Credit market programs||20.08||19.09||0.00||3.36|
|Total for TARP||$456.56||$421.20||$22.72||($40.54)|
To date, cash recovered in excess of TARP’s initial investments has been generated from its bank investment programs and credit market programs. TARP’s auto programs and housing programs are expected to return less than their initial investments. Treasury’s investment in AIG through TARP resulted in a loss. However, when combined with other Treasury investments in AIG, Treasury experienced a net gain of $2.4 billion.
The Treasury Department estimates TARP will bear an overall lifetime loss of about $41 billion, as further funding of TARP’s housing program is expected. According to the Treasury Department, funds that have been or are expected to be dispersed under TARP’s housing program are generally not considered recoverable.
TARP’s bank investment program consists of five components, of which the CPP was the most significantly funded component. The CPP was designed to bolster the capital position of viable banks of all sizes and locations, though the program heavily supported banking organizations with less than $10 billion in assets. (For locations of these TARP fund originations, see Figure 1 below.) Under the program, 707 institutions received capital investments. (See Figure 2 below). In exchange, the Treasury Department received preferred stock or debt securities at a dividend rate of 5 percent for five years and 9 percent thereafter. In addition, the Treasury Department received warrants to purchase stock or other securities.
According to the Treasury Department, $2.8 billion of the $245 billion dispersed under the bank investment program remains outstanding today, primarily from the CPP. As of Sept. 30, 15 percent of the initial CPP recipient institutions remained in the program.
The Treasury Department continues to unwind most of its TARP programs. Only TARP’s housing initiatives are actively funded. Cash collections under TARP’s bank investment programs represent more than 100 percent of the original Treasury investment. This level of repayment exceeds original expectations for the five components of TARP’s bank investment programs. Overall, relative to original expectations and perhaps to public perception, TARP’s bank investment programs appear to have been successful in stabilizing banking conditions and at a cost far less than originally projected.