Bailout ef­fort nears the fin­ish

As the head of TARP re­signs, he and some oth­ers call it a suc­cess. Crit­ics cite losses and say it has fallen short of its orig­i­nal goal.

Los Angeles Times - - Front Page - Jim Puz­zanghera re­port­ing from washington

The fed­eral pro­gram will for­mally end Oct. 3 with vary­ing opin­ions of its ef­fects.

As one of the most con­tro­ver­sial chap­ters in U.S. eco­nomic his­tory draws to a close, the Obama ad­min­is­tra­tion and its crit­ics are writ­ing very dif­fer­ent obit­u­ar­ies of the $700-bil­lion fund that bailed out Wall Street and the do­mes­tic auto in­dus­try.

Trea­sury Sec­re­tary Ti­mothy F. Gei­th­ner said the much-ma­ligned Trou­bled As­set Re­lief Pro­gram “suc­ceeded in ways that none of us could have imag­ined.” And Her­bert M. Al­li­son Jr., who re­signed Wed­nes­day as TARP’s head, said the fund laid the foun­da­tion for the nation’s re­cov­ery — “at a frac­tion of the cost that was orig­i­nally an­tic­i­pated.”

The pro­gram for­mally ends Oct. 3, ex­actly two years af­ter its en­act­ment by a panic-stricken Congress as the swift-mov­ing fi­nan­cial cri­sis threat­ened to plunge the world into an­other Great De­pres­sion.

Af­ter ini­tial con­cerns that most if not all of the $700 bil­lion in tax­payer money would never be re­cov­ered, the non­par­ti­san Con­gres­sional Bud­get Of­fice re­cently es­ti­mated that TARP would cost tax­pay­ers $66 bil­lion.

The fund’s biggest ini­tia­tive, in­ject­ing $205 bil­lion in more than 700 banks nation-

wide, is now pro­jected to make nearly $10 bil­lion in profit. Al­most three-fourths of that money has been re­paid along with div­i­dends and the sale of stock op­tions the govern­ment re­ceived with the cash in­jec­tions.

De­spite the deep anger over the bailout that has made TARP a four-let­ter word to many, the emerg­ing con­sen­sus among econ­o­mists is that the pro­gram suc­ceeded in help­ing stem the fi­nan­cial cri­sis.

“It’s prob­a­bly the best fed­eral pro­gram that we’ve done that’s been de­spised,” said Dou­glas J. El­liott, an eco­nom­ics fel­low at the Brook­ings In­sti­tu­tion. “There’s a huge dis­con­nect be­tween the pub­lic per­cep­tion of it …and what it ac­tu­ally ac­com­plished. It was a very im­por­tant part of avoid­ing a true fi­nan­cial melt­down.”

But crit­ics say that any losses are still too large for tax­pay­ers, and that TARP’s cost can’t be mea­sured just by dol­lars and cents.

They said the pro­gram has done lit­tle to re­move toxic mort­gage as­sets from bank bal­ance sheets — its orig­i­nal pur­pose — and fallen far short of its goal to stem home fore­clo­sures and pro­mote jobs.

Repub­li­cans said the Obama ad­min­is­tra­tion has mis­used the pro­gram for po­lit­i­cal pur­poses, such as fund­ing bank­ruptcy plans by Gen­eral Mo­tors and Chrysler that led to govern­ment own­er­ship stakes, and has plowed pay­ments back into new ini­tia­tives in­stead of us­ing the money to pay down the fed­eral debt as re­quired un­der the law.

And crit­ics said TARP has warped the free mar­ket by per­pet­u­at­ing the no­tion that the govern­ment will step in to bail out fi­nan­cial in­sti­tu­tions it deems are too big to fail.

“We will be liv­ing with the con­se­quences of this ill-ad­vised pro­gram years af­ter it has ended,” said Rep. Jeb Hen­sar­ling (R-Texas), who served on the TARP watchdog panel though he voted against cre­at­ing the fund.

TARP was ap­proved by Congress with bi­par­ti­san sup­port in Oc­to­ber 2008. Most law­mak­ers voted for it re­luc­tantly in the face of pre­dic­tions of dire con­se­quences by then-Trea­sury Sec­re­tary Henry M. Paul­son and Fed­eral Re­serve Chair­man Ben S. Ber­nanke.

The pro­gram was orig­i­nally de­signed to pur­chase failed mort­gage-backed se­cu­ri­ties from banks. But Paul­son quickly changed course in the weeks af­ter it was ap­proved, in­ject­ing money di­rectly into banks to pre­vent some fail­ures and to try to get credit flow­ing.

“I think the Amer­i­can pub­lic re­acted, ‘You want to spend how much money … and you’re send­ing it to who?’ “ said Mark Cal­abria, di­rec­tor of fi­nan­cial reg­u­la­tion stud­ies at the Cato In­sti­tute.

Cal­abria, who was a se­nior staff mem­ber on the Se­nate Bank­ing Com­mit­tee at the time of the cri­sis, does not be­lieve the pro­gram was a suc­cess.

The chang­ing tack up­set many in Congress, and the anger was fur­ther fu­eled when Pres­i­dent Bush, and then Pres­i­dent Obama, tapped the fund to aid Gen­eral Mo­tors and Chrysler.

Last fall, the Obama ad­min­is­tra­tion ex­tended TARP for an­other year, but to help off­set the cost of the re­cently en­acted fi­nan­cial re­form leg­is­la­tion, Congress this sum­mer agreed to cut TARP to $475 bil­lion and pro­hibit any new spend­ing ini­tia­tives.

Al­though the pro­gram ends Oct. 3, it could take years to sell off TARP’s in­vest­ments.

“We are go­ing to largely get the tax­pay­ers’ money back,” Gei­th­ner told about 150 peo­ple in­volved in run­ning TARP as he con­grat­u­lated Al­li­son for his ser­vice.

Gei­th­ner ac­knowl­edged the pro­gram “was not per­fect” and noted that a lot of work was still needed to re­pair the econ­omy.

But the work would have been much harder with­out TARP, said Mark Zandi, chief econ­o­mist at Moody’s An­a­lyt­ics.

“If we had not had TARP, the fi­nan­cial sys­tem would have col­lapsed, the Great Re­ces­sion would have been much deeper, the cost to tax­pay­ers mea­sur­ably greater,” Zandi said.

In a July study, Zandi and Prince­ton econ­o­mist Alan Blinder de­clared TARP “a sub­stan­tial suc­cess, help­ing to re­store sta­bil­ity to the fi­nan­cial sys­tem and to end the free-fall in hous­ing and auto mar­kets.”

The Con­gres­sional Over­sight Panel, set up to monitor TARP, largely agreed. In a re­port last week, the panel said the pro­gram “pro­vided crit­i­cal govern­ment sup­port to the fi­nan­cial sys­tem” dur­ing a se­vere cri­sis.

But the re­port also said TARP had a “far more limited” ef­fect on its other goals of pro­tect­ing home val­ues and re­tire­ment and other sav­ings ac­counts as well as pro­mot­ing jobs and eco­nomic growth.

An ad­min­is­tra­tion re­port Wed­nes­day showed the prob­lems TARP has had stem­ming fore­clo­sures through its $75-bil­lion mort­gage mod­i­fi­ca­tion pro­gram. About 468,000 bor­row­ers had their mort­gage pay­ments per­ma­nently re­duced through Au­gust, but about half the 1.3 mil­lion home­own­ers in trial re­duc­tions have dropped out.

Per­haps worse, the panel said, TARP has been so widely un­pop­u­lar that it could make it tougher for the govern­ment to re­spond to fu­ture crises.

“The TARP may have saved our fi­nan­cial sys­tem, but it leaves be­hind a deeply trou­bled econ­omy [and] a stigma against govern­ment in­ter­ven­tion in the econ­omy,” said Da­mon Sil­vers, one of the over­sight panel mem­bers.


Ger­ald Her­bert

TARP’s ex­it­ing chief says it laid the foun­da­tion for the nation’s re­cov­ery.

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