Isaac: The Cost of TARP

Treasury tells us that the Troubled Asset Relief Program(“TARP”) is going to cost taxpayers “only” $50 billion, down from the previously estimated $105 billion. If the latest estimate is accurate does that mean that the folks who voted for TARP got it right? Read on, and decide for yourself.

Recall that Congress approved TARP to allow the government to purchase $700 billion of bad loans held by banks. I argued that the asset purchase would not solve the problems in our financial system and that the government would overpay for the loans, mismanage them, and ultimately sell the loans to investors at a huge loss.

The Treasury saw the light about two weeks after TARP was enacted. Instead of using our money to purchase toxic assets, it invested in the stock of banks.

So those who voted in favor of TARP – whatever it ultimately costs taxpayers – have nothing to be proud of. It was a program so flawed that even Treasury Secretary Paulson, who rammed it through Congress, decided not to implement it.

Financial Crisis
Financial Crisis

I advocated a capital infusion program administered by the FDIC, which had existing authority to do so without TARP.

I have no doubt that the FDIC and other financial regulators would have carried out that program in a more effective and less political fashion than Treasury.

Among other things, I am confident the FDIC would not have bailed out Chrysler and General Motors and their affiliates and would not have ordered nine mega banks – JPMorgan Chase, CitiGroup, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, State Street, Bank of New York/Mellon, and Merrill Lynch – to accept infusions of taxpayer capital most of them did not need or want. I would also like to think that the FDIC would have demanded that the major creditors of AIG participate in its rescue.


Let’s return to the issue of TARP’s cost.

Author John Talbott, who predicted the economic crisis, tallies what he believes are the real costs of TARP in his October 1, 2010 article in the Huffington Post.

Talbott argues that it is deceitful to claim that TARP cost “only” $50 billion because that ignores the direct and indirect costs of the full range of bailout programs surrounding and supporting TARP. It seems self-evident that the cost of TARP would have been much higher had these other bailout programs not been in place. Here are Talbott’s estimates of the total bailout costs, excluding TARP:

  1. Fannie and Freddie bailout = $700 billion.
  2. Federal Reserve printing money to fund purchase of mortgage securities from banks which directly leads to inflation, a hidden tax on consumers and savers = $2 trillion.
  3. Eventual FDIC losses = $500 billion.
  4. Credit union guarantees = $50 billion.
  5. Present value cost of lost interest income to savers due to government's zero interest rate policy = $2 trillion.
  6. Present value cost of additional unemployment and lost wages caused because the government focused on bank and Wall Street profitability first, rather than on job creation = $5 trillion.
  7. Total loss in housing values due to inappropriate response to overbuilding and high foreclosures = $4 trillion.
  8. Cost of future bad loans created since 2008 by Fannnie, Freddie and FHA continuing to lend aggressively into declining real estate markets = $300 billion.
  9. Wasted stimulus money = $300 billion.
  10. Total estimated cost of government bailout = $14.85 trillion.

While I accept Talbott’s premise that all bailout costs must be considered in evaluating the TARP program, I believe that some of Talbott’s numbers are too high (for example, $500 billion in losses for the FDIC and $700 billion for Fannie and Freddie). Other losses Talbott includes are not supportable. For example, we have not yet experienced inflation (although we certainly could), and he attributes $5 trillion in cost to lost wages due to the government focusing on healing banks rather than on creating jobs. I know of no way to create jobs without strong banks capable of lending money.

"Most of the social and economic cost of the crisis would not have happened had we regulated financial institutions properly and had we managed the crisis more calmly and professionally." -Chairman LECG Global Financial Services & Fifth Third Bancorp, William Isaac

Let’s cut Talbott’s $14.85 trillion by two thirds. That still leaves $5 trillion to be factored into the bailout equation.

Talbott does not include the cost of destroying public confidence through the use of highly inflammatory rhetoric (“financial Armageddon”!) in selling the TARP program. There’s no doubt in my mind that the selling of TARP created enormous fear and uncertainty and deepened and prolonged the recession.

Most of the social and economic cost of the crisis would not have happened had we regulated financial institutions properly and had we managed the crisis more calmly and professionally. When you enter the voting booth remember this and also remember that the recent financial reform legislation fixes almost nothing.

William Isaac, Chairman of the Federal Deposit Insurance Corporation during the 1980s is chairman of LECG Global Financial Services and Fifth Third Bancorp, and the author of "Senseless Panic: How Washington Failed America." The views he expresses are his own.