TARP: A Success Story? - Analyst Blog

The $700 billion Troubled Asset Relief Program (TARP), which was initiated two years back to rescue the nation's financial industry, moved another step forward toward success with the repayment of $2.66 billion by six banks last Wednesday. The repayments have further lowered the cost of TARP to taxpayers.  

After functioning for two years, TARP expired in October. But many of the banks are yet to repay the funds they had taken as part of their participation in the program. However, both the Obama administration and the Congressional Budget Office (CBO) believe TARP has so far been less expensive for taxpayers than was expected earlier.

Banks That Paid Back

Huntington Bancshares (HBAN) returned the government $1.4 billion it had taken during the financial crisis, First Horizon National Corp. (FHN) repaid $866.5 million, Wintrust Financial Corp. (WTFC) paid back $250 million, Susquehanna Bancshares Inc. repaid $100 million, Heritage Financial Corp. returned $24 million and The Bank of Kentucky Financial Corp. repaid $17 million. The Treasury still holds $17 million in preferred shares of Bank of Kentucky Financial.

The government also received a total of $13.7 million in dividends from these banks in exchange for their loans.

Is Repayment in Limbo?

Out of the $247 billion handed out to the banks, a major portion has come back from the nation's healthy banks. Also, taxpayers have received decent returns on many of their financial-sector investments. Repayments under the TARP have generated about 17% annualized return from stock-warrant repurchases.

However, more than 600 banks are still holding above $60 billion in TARP funds. Additionally, in the last few months, many financial institutions failed to pay the compulsory dividend related to the TARP funds they had taken from the Treasury.

TARP: A Cost Efficient Program? 

The major success of TARP is its lower-than-anticipated cost to taxpayers. The estimated overall cost has been continuously decreasing.

According to an estimate released by the CBO last month, the cost related to TARP is expected to drop to $25 billion from $66 billion estimated 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. The present estimate by CBO is a quantum drop from the Treasury's initial estimate of $350 billion.

Though $25 billion is not a small amount, the benefits already achieved by the program and its reduced cost as against previous estimates has been able to silence quite a few detractors.

How Much Did the Taxpayers Earn?

According to the data obtained by The Associated Press earlier this month, TARP has already earned about $35 billion in income.

The government's sale of the Citigroup Inc. (C) stock was the primary income driver. The Treasury has been selling off its stake in tranches since April. Altogether, the Treasury ended up with a profit of $12 billion on its $45 billion investment.

Also, a significant amount came through dividend payments from many of the bailed-out institutions. In November, the income from TARP increased 17% over October.

More Success to Come

Though most of the major financial institutions have repaid their TARP loans in full, a lot of money is still expected to be recovered. So the ultimate success of TARP is yet to be seen.

A substantial part of the TARP fund is expected to be lost in the Home Affordable Modification Program (HAMP), but the Treasury is in the process of recovering as much as possible. The Treasury is also working with regulators and defaulting institutions to recover the money at the earliest. As a result, there is a strong possibility of further cost reduction, driving more success.

 
CITIGROUP INC (C): Free Stock Analysis Report
 
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