The "Greater Good" of TARP - Analyst Blog

According to the data obtained by The Associated Press on Thursday, the $700 billion Troubled Asset Relief Program (TARP) has already earned about $35 billion in income. The program was initiated two years back to rescue the nation's financial industry.

So the government's highly criticized bailout program has finally been able to silence quite a few detractors well ahead of the end result. The program has been effective in easing the pressure on markets for credit and capital. This has also restored confidence in the financial system to a great extent. Probably, the best is yet to come.

Income Drivers

The income increased primarily due to the government's ongoing sale of the Citigroup Inc. (C) stock. Earlier this week, the Treasury announced the fifth and final sale of its remaining 7% stake or 2.4 billion shares of Citi. The latest sell-off is expected to generate proceeds of $10.68 billion on the basis of the proposed offering price of $4.45 per share. The Treasury's acquisition price of the Citi stake was $3.25 per share.

Citi received a total of $45 billion in bailout funds from the Treasury in 2008. As a result, the government stake in Citi stood at 36%. However, it had repaid $20 billion of its debt in 2009, while another $25 billion was converted to 7.7 billion common shares held by the Treasury.

The Treasury has been selling off its stake in tranches since April 2010. Altogether, the Treasury ended up with a profit of $12 billion on its $45 billion investment.

There was also another source of income. Though many financial institutions failed to pay the compulsory dividend related to the TARP funds they had taken from the Treasury, a significant amount came from dividend payments from other institutions. Finally, the income from TARP increased 17% over the prior month in November, according to The Associated Press.

More Cost Efficient Than Anticipated? 

Another major success of TARP is its lower-than-anticipated cost to taxpayers. The estimates of its overall cost have been continuously decreasing.

According to an estimate released by the Congressional Budget Office (CBO) last month, the cost related to TARP is expected to drop 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, as against its $91 billion estimate during its mid-session review in August 2010. The present estimate by CBO is a quantum drop from the Treasury's initial estimate of $350 billion.

Cost Components

The assistance to American International Group (AIG), support to automakers and efforts to prevent foreclosures are the primary components of the cost. Together, 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. Both the income from TARP and the lower estimated cost follows much flak and many doubts about its efficiency.

A Better Future Ahead?

The final success of TARP is probably still to be seen. 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 have repaid their TARP loans in full. Also, more than 600 banks still hold $65 billion in TARP funds.

Though a substantial part of the TARP fund 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 defaulting institutions to recover the money at the earliest. As a result, there is high possibilityof further profit and cost reduction in future, driving more success.

 
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