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TARP, the Troubled Asset Relief Program, officially expires on Sunday, two years after being enacted. The US Treasury will no longer be able to commit money on new initiatives or recycle repayments to other purposes.

The program was introduced in the aftermath of the collapse of Lehman to save the financial system. Initially, Treasury was to purchase or insure up to $700 billion of so-called troubled assets from banks and other financial institutions in the US. With the exception of AIG, FannieMae and FreddieMac, Tarp funds have not been used to purchase any troubled assets. Treasury and the financial institutions could not agree on prices for these assets.

Critics demanded low prices to punish the bankers. They wanted blood on Wall Street. Paul Krugman, the Princeton economist and New York Times editorial writer, was one of the most vocal critics. In one editorial (February 1, 2009), he called the program a “bailout for blunderers” and he repeatedly called for the nationalization of the “zombie” banks.

Low prices would have resulted in the insolvency of most major financial institutions, creating real “zombie” banks, and thus would have exacerbated rather than ameliorated the financial problems. The US Treasury correctly resisted these demands.

After Gordon Brown, then the British PM, and Alistair Darling, his Chancellor of the Exchequer, announced their plan to make equity injections into the major banks, effectively nationalizing most, Henry Paulson, the US Treasury Secretary, decided to use some of the TARP funds to buy senior preferred stock and warrants in many US banks rather than buy any troubled assets. This move was applauded by many of the original TARP critics.

In December 2008, TARP as modified further so that funds could be used to support the auto industry, in particular, GM, Chrysler, GMAC and scores of suppliers.

When Obama took office, his first budget indicated that TARP might need an additional $750 billion. The losses were expected to run into the hundreds of billions.

On February 1, 2009, Krugman warned: “Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it’s done right, is going to cost hundreds of billions more.”

By March (March 5, 2009) he seemed even more pessimistic: “this means that the government would have to lay out trillions of dollars to bring the financial system back to health”.

In mid-year 2009, the Obama administration projected TARP losses of $341 billion.

Fortunately, the Cassandras have been proven wrong.

The US Treasury never tapped the full $700 billion. It disbursed only $387 billion, most of the funds used to prop up AIG, the auto industry and homeowners. Yesterday, the current Treasury Secretary, Tim Geithner, estimated the total losses for TARP at less than $50 billion. Indeed, if AIG succeeds in repaying its loans, the US Government might even turn a profit on TARP. It already has done so on the funds used to invest directly in the banks.

The program never did evolve in the direction originally planned, and it morphed well beyond the original plan. Mistakes were made, especially in dealing with the counterparties to the credit default swaps sold by AIG. The debate about its effectiveness will continue for years. Questions will continue regarding whether TARP was even needed.

However, despite the fact that most Americans hated what they perceived as a bailout of Wall Street and the rich bankers of New York, TARP has not been and never did come close to being the financial disaster expected by many.

By the way, the UK Government is still a major shareholder in many UK banks, the UK financial system has not recovered as quickly or fully as the US system, and Gordon Brown is no longer the Prime MInister. (PS: Krugman was an enthusiastic fan of Brown and his plan.)

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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