TARP Bailout Program

Did TARP Help You or the Banks?

Tim Geithner
U.S. Secretary of the Treasury Timothy Geithner testifes during a hearing before the Congressional Oversight panel, which was created to oversee the expenditure of Troubled Asset Relief Program (TARP), December 10, 2009 on Capitol Hill in Washington, DC. Photo by Alex Wong/Getty Images

Definition: The Troubled Asset Recovery Program (TARP) was an outgrowth of the October 2008 bank bailout bill. Then-Treasury Secretary Hank Paulson's original idea was to set it up as a reverse auction.

Here's how it was supposed to work. Banks would submit bid prices on their toxic mortgage-backed securities to the Treasury Department. Treasury administrators would select the lowest price offered.

The banks didn't want to take a loss, so they wanted Treasury to pay full price for these assets. The government knew they were worth far less. Ultimately, this reverse auction was unworkable, so Paulson shelved the plan.

On October 14, 2008, Europe and Japan central banks agreed to infuse companies with cash immediately. Paulson agreed to use the bailout money to align with their plan.  That's when the bailout bill became TARP. Treasury initially used $105 billion of the $700 billion authorized by Congress. It bought preferred stock in eight banks: Bank of New York Mellon, Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America/Merrill Lynch, Citigroup, Wells Fargo, and State Street. The Capital Repurchase Program required banks to give the government a 5% dividend that would increase to 9% in 2013. That encouraged banks to buy back the stock within five years. Paulson knew the government would make a profit because bank share prices would be higher by then.

In addition to the eight banks, TARP funds were used to either buy preferred stock in, or make loans to:

An additional $20 billion of TARP was loaned to the TALF program, managed by the Federal Reserve.

 Congress only approved half of the $700 billion bill to be used in 2008. The remaining $350 billion was never used. (Source: Treasury Dept.)

President Obama wanted to tax banks to repay taxpayers for $120-$141 billion he thought they would lose from TARP. Obama planned to levy the tax over 10 years on the banks' riskiest activities, such as trading, and not on their retail operations, which would get passed on as higher prices to customers.(Source: HuffPo, Obama to Push Tax on Too Big to Fail Banks)

How Was It Paid For?

In FY 2009,the government spent $150 billion to rescue troubled banks. In FY 2010, banks paid back $110 billion and another $38 billion in FY 2011. In other words, TARP provided a surplus to the budget as banks paid back the bailout.

TARP used $35 billion in FY 2012 for programs to help homeowners modify mortgages and avoid foreclosure. This was part of the Homeowner Affordable Modification Program, or HAMP. In FY 2013, TARP budgeted $12 billion for HAMP.

How Much Did TARP Cost Taxpayers?

In May 2009, Bernanke said that the results of the banking system's "stress tests" were encouraging. The tests found that 9 of the country's 19 largest banks did not need to raise additional capital to offset future write-downs of toxic mortgage-backed securities (MBS).

Some banks are already willing to repay the government funds they borrowed through TARP last fall. The stress test confirmed that Capital One, U.S. Bancorp and BB&T Corp. are healthy enough to sell shares to repay TARP funds.Goldman Sachs had already offered to pay back $5 billion it borrowed.

Two banks - Bank of America and Wells Fargo - were responsible for one-third of the $75 billion that needed to be raised. Bernanke was encouraged because Wells Fargo quickly raised $8.6 of the $13.7 billion it needed. In addition, the tests showed that losses from the 19 banks through the end of 2010 would not be more than $950 billion.

It also appeared the banks would not need more federal funds. (Source: Bloomberg, Bernanke Encouraged by Banks' Plans, May 11, 2009. LA Times, Banks' Stress Test Results Hint at Recovery, May 8, 2009)

As of May 2016,  the banks had paid the government back with interest. In total, $250.46 billion in TARP funds were committed to assisting 700 banks.  Of that, $165.33 went to the big banks (assets of $10 billion or greater.) Another $14.57 billion went toward the smaller banks. The remaining went to prop up Citigroup and Bank of America.

The big banks paid back $179.51 billion in principal and interest. The small banks only returned $13.94 billion, since more of them went bankrupt despite assistance. Citigroup and Bank of America returned $81.59 billion. All told, the banks repaid $275.04 billion, creating a $25 billion profit. (Source: Monthly TARP Update, U.S. Treasury, May 2, 2016.)

Banks Blocked the TARP Program for Homeowners

The HARP (Homeowner Affordable Refinance Program) would have helped stimulate the housing market by allowing credit-worthy homeowners who were upside-down in their homes to refinance with lower mortgage rates. It would have pumped billions into the economy and helped 2 million homeowners. If expanded, it could have helped all 25 million homeowners who are upside-down with their mortgages. Why didn't it work? Because banks were just too risk-averse, according to Bloomberg. The Obama Administration introduced HARP in April 2009, but only 810,00 homeowners were helped. Of those, only 57,171 were more than 5% upside down. The rest had higher equity. Banks cherry-picked applicants and refused to consider those with lower equity. These were the same banks that gave loans to anyone a few years earlier.

There was no risk to the banks, as all these loans were guaranteed by Fannie Mae or Freddie Mac. Banks didn't want to be bothered with the paperwork involved with homeowners who have mortgage insurance. That, of course, applied to everyone with less than 20% equity.