Treasury Says Unpopular TARP Bailouts Exceeded Expectations

Despite its enormous unpopularity among voters, the government’s Wall Street bailout plan succeeded much more quickly and at a lower cost than expected, a U.S. Treasury report released Tuesday said.

“The Troubled Asset Relief Program has succeeded faster, and at a much lower cost, than expected,” the report said.

The final cost to taxpayers of what started out to be a $700 billion Wall Street bailout will be about $50 billion. An expected $20 billion return for selling the government’s stake in American International Group would bring the final cost down to $30 billion, the report said.

But other losses stemming from the financial crisis and housing market crash that led to the government takeover of mortgage giants Fannie Mae and Freddie Mac could end up costing taxpayers much more. The report said the total cost of all of the government’s financial interventions will amount to less than 1 percent of Gross Domestic Product, which would amount to $132 billion in a $13.2 trillion economy.

“TARP undoubtedly helped to stem the financial panic in the fall of 2008 and contributed to the stabilization of the financial system,” Treasury Secretary Timothy Geithner said in a letter accompanying the report to Congress.

The report on the benefits of government actions to stem the financial crisis that threatened to freeze the U.S. economy in 2008 comes just weeks before the November 2, congressional elections. It could help cool voter anger over the program and give incumbent candidates who voted for the bailout some ammunition against critics.

New investment authority under the TARP program expired last Sunday, exactly two years after the fund was created by Congress to try to stem a financial system meltdown.

The Treasury’s report concluded that the program helped stem investor fear about failing financial institutions and said that credit markets have reopened, although some businesses and other borrowers still find it hard to get credit.

The report noted that mortgage rates were brought down to historic lows and that municipalities are able to borrow at historically low rates.

“Thanks to the coordinated and forceful actions of Congress, the Obama Administration, the Federal Reserve, the FDIC (Federal Deposit Insurance Corporation), and other regulatory agencies, the U.S. financial system is much stronger today than it was in the fall of 2008 and early 2009,” the report concluded.

But the U.S. financial and economic recovery still faces significant headwinds, it added.

“The contraction in many categories of bank lending reflects a combination of persistent weak demand for credit and tight lending standards at the banks, amid continued pressure on many bank balance sheets, particularly from commercial mortgage losses,” the report said.

Outside of the TARP program, the Treasury said it expects substantial losses from the government’s takeover of mortgage giants Fannie Mae and Freddie Mac.

“These losses stem from poor credit choices and bad risk management decisions before the Federal Housing Finance Agency (FHFA) placed (Fannie Mae and Freddie Mac) in conservatorship in late 2008 — not actions taken in 2009 or 2010,” the report said.

It added that some of the losses will be offset by profits from some $200 billion in mortgage-backed securities purchased by the government.

“Those investments are generating notable returns,” it said.

(Reporting by Donna Smith; Editing Dan Grebler)

Topics USA