The Hunt for the Elusive TARP Profit

by Tim Cavanaugh

Former Secretary of the Treasury Tim Geithner’s book Stress Test came out Monday, but it’s still getting less attention than a puff piece on Geithner by New York Times reporter Andrew Sorkin that appeared during the pre-promo for the book. Geithner claims in that article that the $700 billion Troubled Asset Relief Program will eventually turn a profit for the government, reopening an old controversy.

“We are going to earn, all in, a couple hundred billion dollars,” Geithner tells a group of Harvard students whom Sorkin, prompted by Geithner himself, describes as being harsh and unflinching in their questions. (Geithner is a master at this “Wow, tough crowd!” rhetorical trick, in which he pretends to be put upon by what are in fact friendly interlocutors.) The “TARP profit” has become a standard figure of recession history, favored by Republicans who recall that the bank rescue package was initiated in 2008 by Republican Treasury Secretary Henry Paulson under Republican President George W. Bush.

In an excellent New York Sun opinion piece, Ira Stoll gives multiple reasons to be sour on this good news. Among other things, Stoll puts the amount of the profit claimed by Sorkin (following a tally at Pro Publica) into perspective:

The Times article explicates the point. “The evidence is persuasive,” it reports. “ProPublica, the nonprofit investigative organization, which keeps a tally of the bailout, puts the current profit at $32 billion. The White House Office of Management and Budget estimates that Fannie and Freddie will turn a profit of $179 billion over the next decade….A larger point is indisputable: While the returns were never the goal — saving the system was — they are indeed evidence of its success.”

There’s nothing like a New York Times claim that a point is “indisputable” to tempt me into disputing it, thereby disproving the claim . . . 

The return is not impressive. Mr. Geithner and the Times tend to talk about the profits — “$32 billion,” “a couple hundred billion dollars” — without mentioning the amount spent or the amount of time it was invested. The same ProPublica scorecard that shows the profit — $30.4 billion, not the $32 billion the Times claims — says $611.2 billion has gone out the door. A $30 billion return on $611 billion is a return of about 5 percent total over five years. That’s pathetic during a five-year period in which the total U.S. stock market has been returning about 19.5 percent a year, or a compounded total return of about 150 percent. Even if you use the “$179 billion” or “couple hundred billion,” figure, if it is the return over 15 years on a $611 billion outlay, it’s not exactly a spectacular success.

At Naked Capitalism, Susan “Yves Smith” Webber cites the most recent Congressional Budget Office TARP report, which still shows a $27 billion cost:

I advise caution in assessing claims about TARP profits. Going back to 2009, there have been projections of a new and usually larger TARP profit every few months. But then a few months later that TARP profit pulls a Chuck Cunningham. Hop in the Wayback Machine: 

September 1, 2009

U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands
The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

January 27, 2010:

How Uncle Sam will profit from TARP
The CBO projects the government will ultimately make a profit of $7 billion from assisting the banks: $3 billion from the Capital Purchase Program, in which the government propped up banks by purchasing preferred stock; $2 billion from helping Citigroup (C, Fortune 500); and another $2 billion from helping Bank of America (BAC, Fortune 500).

June 23, 2010:

TARP: A Profit For Taxpayers?
The Treasury Secretary said that more than half of the funds lent through the program have been paid back along with $24 billion in additional revenue.

January 27, 2011:

TARP Profit on Citigroup: $12.3 Billion
Overall, taxpayers are expected to end up with a $12.3 billion profit on the government’s $45 billion investment in the company during the 2008 financial-sector bailout.

March 17, 2011:

TARP Yields $20 Billion Profit, Treasury Says
Taxpayers have now recovered “more than 99% (about $244 billion) of the approximately $245 billion in total funds disbursed for TARP investments in banks,” the Treasury said.

April 1, 2011:

TARP’s $24 Billion Profit: Some Demand a Recount
Treasury Secretary Timothy Geithner said that while the government’s overriding objective was to “break the back of the financial crisis and save American jobs,” it didn’t hurt that the TARP investments in U.S. banks “delivered a significant profit for taxpayers.”

July 5, 2011:

Treasury announces $10 billion in TARP profit from banks
Treasury now estimates that when all is said and done, the section of TARP devoted to banks will net taxpayers a $20 billion profit.

April 12, 2012:

Treasury: Taxpayers Likely to Profit From Financial Rescue Programs
When housing programs are excluded, the Treasury now expects a $2 billion TARP profit.

April 13, 2012:

Treasury Says TARP Is Turning Into A Moneymaker For Taxpayers
TARP housing programs will lose $16 billion or $46 billion, depending on whether you take the view from the Congressional Budget Office or the White House’s Office of Management And Budget.

August 10, 2012

How the Treasury is Turning a Profit on TARP
Do you feel $19.6 billion richer?
Because that’s how much “profit” the government has turned on the central component of the now-infamous Troubled Asset Relief Program.

October 25, 2012

Barack Obama says banks paid back all the federal bailout money
And, as of Oct. 18, the day of the president’s speech, the government had taken back about $266.7 billion, according to the treasury count– about $21.5 billion more than the initial investment.

December 11, 2012

U.S. Treasury exits AIG as markets await rebound
Even with the windfall, the government will likely lose money on its Troubled Asset Relief Program, the $700 billion bailout launched in the darkest days of the crisis. Banks and auto companies still owe taxpayers tens of billions of dollars…
Even with the profit on AIG, $38 billion in TARP funds have yet to be recovered, the Treasury said.

September 9, 2013

We’re almost break even on the bailout
Five years later, taxpayers still haven’t broken even on the $698.2 billion in government bailouts issued during the financial crisis.
But we’re getting close.

May 9, 2014

The State of the Bailout
Altogether, accounting for both the TARP and the Fannie and Freddie bailout, $611B has gone out the door—invested, loaned, or paid out—while $387B has been returned.
The Treasury has been earning a return on most of the money invested or loaned. So far, it has earned $255B. When those revenues are taken into account, the government has realized a $30.4B profit as of May 9, 2014.

One of the interesting things about the TARP profit is that it often gets smaller as time goes by. Only the U.S. government could have discovered the miracle of anti-compounding. The numbers also range from strikingly precise (“$19.6 billion”) to it’s-all-good (“a couple hundred billion dollars”).

But assume the bull market continues until the end of time, that General Motors doesn’t end up recalling every car it has ever made, that they can inflate the dollar until it trades at par with Vietnamese dong, and that the TARP profit turns out to be as real as Lo Pan. The TARP would still be wrong because it was morally wrong.

Understand: I also think it was economically wrong. Recession is the health of the economy, and there is a strong case to be made that letting more of the financial colossi bite the dust would have brought about a much more shocking but much shorter recession, along with an actual recovery. In the event we rescued the biggest financial players at the cost of an economic stagnation that is now in its sixth year. And as Stoll indicates, time is a factor here too. Anyway, we can’t test the counterfactual. (Though we can study one micro-example: Iceland, which had no choice but to lose its entire financial system, has recovered faster than any other European country.)

The more important evil of TARP was that it made a conceptual change in the way the public thinks about the financial system (even though ironically the public was solidly opposed to TARP). We have moved from an understanding of the “interconnectedness” of the global finance system (in the sense that a firm has many trading and lending partners) to a model of high-finance socialism, in which an injury to one is an injury to all, even, or especially, if you have no way to prove that claim.

TARP was also one of the worst infantilizations of the public I’ve ever seen outside the context of getting the country ready to go to war. Paulson, mewling and puking, engaged in a months-long campaign to spook the populace and rush through his one-page rescue package. That panic went into overdrive when the House of Representatives, in an almost unbelievable act of courage, voted the TARP down the first time. The one bright spot in that era was that it evoked my favorite Mike Pence quote (from memory): “The only other place I hear people saying you have to act right now is at a used car lot. Any time somebody’s telling you you have to act now, there’s more in the deal for him than there is for you.”

But maybe the worst thing about the TARP, which in my view makes it worse than a simple waste of money like the ARRA stimulus, was that it came from the “fiscal conservative” side. Those 44 percent of poll respondents who still blame George W. Bush for the lifeless economy may just be stubborn Democrats, or they may remember how that “free-market guy” had to “abandon free-market principles to save the free-market system.” The move foreclosed any defense of an open economy and paved the way for Dodd-Frank, the CFPB and countless other intrusions into the private sector.

Yves Smith for some reason thinks I don’t like former SIGTARP Neil Barofsky and consider him a “liberal.” (I have praised Barofsky repeatedly and all I said was that he was on the “left” of the Obama brain trust, in the sense that he showed or claimed to show more populist instincts than Geithner.) But she has a good recitation of the way the Times’ Sorkin shills for the eternal golden boy Geithner:

The focus on TARP (and to a lesser degree, Lehman) allows Sorkin to omit mention of actions that were clearly Geithner’s doing, including: his fighting Sheila Bair tooth and nail on resolving the clearly insolvent Citigroup; his decision to pay AIG credit default swaps counterparties 100 cents on the dollar; his defense of the failure to haircut AIG employees’ pay; Treasury’s acceptance of intransigence by AIG’s CEO, Robert Benmosche; his refusal to use $75 billion in TARP that Paulson’s Treasury had courteously left aside for homeowner relief; the clearly too permissive “stress tests,”; Geithner’s Treasury allowing banks to repay TARP funds early rather than rebuild their balance sheets (get this: because they were eager to escape very limited restrictions on executive pay); Treasury letting banks repay TARP warrants at an unduly cheap price until Elizabeth Warren’s Congressional Oversight Panel caught them out; his cynical policy of “foaming the runway,” as in using what were billed as homeowner relief programs merely to attenuate foreclosures and thus spread out bank losses, which had the secondary effect of wringing more money out of already stressed borrowers before they were turfed out of their homes. And this is far from a complete list of Geithner’s actions that favored banks over the public at large.

I disagree with a lot of this. I vehemently oppose the idea that the taxpayer has any obligation to bail out people who screwed up on their mortgages. The leniency of the stress tests I think was not that big a deal because only a few of the big banks were actually facing an existential threat. And nitpicking about CEO pay after you have already decided not to let the CEO go out of business strikes me as the most pointless exercise imaginable. But there’s no way to argue about any of that now.

If you want to know why mortgage deadbeats can still stake a claim to your wallet and nobody can tell them no; why resurgent Marxist dumbbells can describe the banking system merely as Capital protecting its expropriated surplus value and not be refuted; why the blurbists for Geithner’s book are three multimillionaires and one multibillionaire; why the Republicans have now gone six years and two presidential elections without a coherent economic message; look no further than the TARP.

Just don’t expect to get any money back from it.

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