Will TARP Make a Profit? That's the Wrong Question
We return this week to our previously scheduled programming, the pointless debate over whether the 2008 financial bailout will be a money-maker or a money-loser for U.S. taxpayers.
The occasion is a report by the Troubled Asset Relief Program's inspector general, which says it is a "widely held misconception that TARP will make a profit" and predicts the program will ultimately cost $60 billion. Not surprisingly, this ignited the blogosphere, with various pundits excoriating the U.S. Treasury Department for its impotent investing prowess.
In some ways this is the Treasury's own fault. The department never misses an opportunity to talk about how "cheap" the bailout will be, including a report earlier this month crowing about how taxpayers "may realize a gain" or will at least break even. The report estimates the projected cost of TARP at $60 billion -- the same number the TARP inspector general uses -- but makes assumptions about its investments and programs to say that the U.S. "may realize a positive return." The differing estimates rely on a host of volatile factors, including the success of foreclosure prevention programs, unwinding Fannie Mae and Freddie Mac, and the performance of AIG, in which the government still holds about a 70 percent stake.
No one knows exactly how much the bailout will ultimately cost -- and while it may be fun to beat up on the U.S. government, the debate misses the point. The bailout was never intended to make money. Its purpose was to prevent a financial cataclysm (what else could have prompted former Treasury Secretary Henry Paulson to get on bended knee and beg then-House Speaker Nancy Pelosi for help?).
One can argue the merits of a public rescue of the financial sector. But if that was the goal, it's hard to argue the U.S. missed its mark. Banks, if you haven't noticed, are doing just fine, thank you.
A more valid criticism is that the bailout wasn't well executed and that it sometimes resulted in increased risk-taking, worsening moral hazard and the "too big to fail" problem that got us here in the first place. In 2008, the government's response often seemed on-the-fly, with asset purchases on the table one day and capital injections the next.
An amazing report last month by Federal Reserve economists finds lasting -- and unfortunate -- consequences, including increased risk-taking at large banks that took TARP funds. These banks, you'll remember, were encouraged to lend the money they got -- rather than simply using it to build up depleted capital levels. The result: They made risky loans. Does this sound familiar?
In a classic understatement, the report points out that increased risk-taking "may reflect the conflicting influences of government ownership on bank behavior. Although TARP money was given to increase bank stability and reduce incentives to take excessive risks, it was also given with the understanding that the funds would be used to expand lending during a period of increased risk."
In other words, the government was trying to solve a problem with one hand while exacerbating it with the other. That's the real lesson of TARP, and the one we ought to focus on as we look for ways to avoid a repeat.
(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)
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