Final report of the Congressional TARP Oversight Panel, March 2011 By John Wihbey
As the U.S. financial crisis unfolded, President Bush and members of Congress authorized on Oct. 3, 2008, a rescue package called the Troubled Asset Relief Program (TARP). Many policymakers believed that the U.S. economy was, in the words of Federal Reserve Chairman Ben Bernanke, on the verge of ‘‘a cataclysm that could have rivaled or surpassed the Great Depression.’’
The Treasury Department was given broad authority to infuse money into faltering banks and other institutions to reestablish stability in the economy as a whole, and 18 large firms immediately received a combined $208.6 billion. The Congressional Oversight Panel was established to keep watch over how the TARP money was spent, and some portion of the funding was used with the expectation that it would be repaid.
The TARP continued under President Obama, and its authority expired in October 2010. In March 2011 the Congressional Oversight Panel issued its findings, “Congressional Oversight Panel: March Oversight Report.” They include:
- The Congressional Budget Office (CBO) estimates the TARP will ultimately cost taxpayers $25 billion; in 2009, the CBO had estimated the cost at $356 billion.
- The Congress authorized $700 billion at the outset of the program, and press reports repeated that number. However, “CBO’s estimates have grown progressively less grim as the economy has recovered and TARP investments have been repaid.”
- The Treasury Department “deserves credit for lowering costs through its diligent management of TARP assets and, in particular, its careful restructuring of AIG, Chrysler, and GM.” However, an additional reason for the lowered cost to taxpayers is that a $50 billion mortgage-related program did not get off the ground and “will accomplish far less than envisioned for American homeowners.”
- TARP found success when it coordinated small numbers of large institutions, but the program struggled when it needed to administer help to larger groups. The Treasury Department’s help to local and regional banks required too long a timeframe and proved “simply too small and too late to have a meaningful effect on financial stability.” Likewise, “Treasury found the task of coordinating hundreds of banks and loan servicers and millions of homeowners to be nearly overwhelming.”
- The later inclusion of Detroit-based automakers in the TARP set a troubling precedent: “Although the TARP seemed originally to target only those companies whose financial operations made them a potential risk to systemic stability, the use of the TARP to support the automotive industry suggests that a company may be considered ‘systemically significant’ merely because it employs a certain number of workers.”
- The bailout of the financial insurance firm AIG was marked by a lack of transparency. The government assumed too much of the financial burden during this process: “The absence of shared sacrifice by private parties undermined the government’s ability to respond to the financial crisis, while also seeding longer-term risks for the effective functioning of the financial markets.”
- Because of the bailout of large financial and industrial institutions, the TARP has created a “moral hazard” — a system-wide expectation that irresponsible institutions may again be saved by the government. This “too big to fail” dynamic, as it is commonly known, has real-world market effects: “Credit rating agencies continue to adjust the credit ratings of very large banks to reflect their implicit government guarantee.”
Tags: economy, financial crisis, campaign issue
Last updated: July 6, 2011
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Citation: "Congressional Oversight Panel: March Oversight Report", Congressional OVcersight Panel, March, 2011, PDF.