TARP: More Efficient Than Thought? - Analyst Blog

According to an estimate released by the Congressional Budget Office (CBO) on Monday, the $700 billionTroubled Asset Relief Program (TARP), which was initiated two years back to rescue the nation's financial industry, will cost taxpayers much less than anticipated.

The CBO now anticipates the cost to come down to $25 billion from its previous estimate of $66 billion in August.The cost is even lower than the Treasury's estimate of $50 billion in October, to say nothing of its $91 billion estimate during its mid-session review in August 2010. The present estimate by the CBO is a quantum drop from the Treasury's initial estimate of a cost of $350 billion.

The Components of the Cost

The assistance to American International Group (AIG), support to automakers and efforts to prevent foreclosures are the primary components of the cost. All these actions are expected to cost about $45 billion. However, a net gain of $20 billion is expected from other transactions.

With the recovery of bailed-out firms, government spending to support the financial system will lessen. AIG and General Motors (GM) have significantly restructured their financial obligations under TARP, making it easy for the government to recoup the TARP loans.

The new estimate follows much flak and many doubts about its efficiency. Though $25 billion is still a lot of money, considering the benefits already achieved and its reduction from previous estimates, the program has been able to silence quite a few detractors.

Further Recovery

Many of the banks are yet to repay the funds they had borrowed as part of their participation in the program, though most major financial institutions, including Citigroup (C), have repaid their TARP loans in full. Also, the Treasury has almost completed auctioning the stock warrants it had acquired from such banks against the loans offered, which has helped recover more of taxpayers' money. However, more than 600 banks still hold $65 billion in TARP funds.

Though a substantial part of the TARP funds is expected to be lost in the Home Affordable Modification Program (HAMP), the Treasury is in the process of recovering as much as possible. The Treasury is also working with the regulators and the defaulting institutions to recover the money as early as possible.

Though it will force the taxpayers to incur some losses, the TARP has definitely been effective in easing the pressure on markets for credit and capital. The decrease in TARP costs from earlier estimates can be read as a further sign of economic recovery.

 
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