Storm Is Over; Can We Remove TARP?

You probably wouldn’t want to hire the Treasury Department as your investment adviser.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, told the Senate Banking Committee Thursday that it is “extremely unlikely” that taxpayers will get back all of the $700 billion committed to the TARP program. So much for the “we’ll make money off this deal” promises that were made before TARP’s enactment a year ago.

TARP’s capital infusions in financial institutions did play “a significant role” in bringing the financial system “back from the brink of collapse,” Barofsky said.

About 30 banks that received investments from the program have paid back about $70 billion of it, plus $6.5 billion in dividends, interests, and fees. Banks also have repurchased about $3 billion in warrants issued to the Treasury Department in connection with TARP investments. The taxpayer has received about a 17 percent rate of return on investments in the banks that have repaid their TARP infusions.

The Treasury Department expects banks to repay another $50 billion over the next 12 to 18 months, according to Herbert Allison, the department’s assistant secretary for financial stability.

Those results aren’t very impressive, however, because these repayments account for only a small percentage of TARP investments, said Republican Senator Mike Johanns of Nebraska.

It’s highly unlikely that taxpayers will get back the $50 billion in TARP money invested in General Motors Corp. or the $180 billion invested in insurance giant AIG, Barofsky said.

“It’s too early to tell how this is going to turn out,” Allison responded.

Senator Mark Warner, a Virginia Democrat, said taxpayers would feel better about their TARP investments if the Treasury Department would hire outside experts to manage large equity stakes. Warner is a former venture capitalist, so he knows a little about risk and return.

Many senators have urged the Treasury Department to let TARP expire December 31, instead of extending it. The U.S. is no longer staring into a financial abyss, so the program is no longer needed, they said.

Allison said the decision on whether to extend TARP is up to Treasury Secretary Tim Geithner, and he didn’t want to “prejudge” a decision that has not yet been made. But his prepared statement indicated the Treasury Department likely will want to continue to have TARP funds in its arsenal.

“Declining prices in the commercial real estate market could put additional pressure on bank balance sheets and capital positions, while continued downward pressure on housing prices could stall a nationwide recovery,” Allison said. “In this context, it is prudent to maintain capacity to address new developments. By bolstering confidence, having such capacity may actually reduce the need to use it.”

Or it may keep banks from raising capital on their own to deal with potential losses on commercial real estate, said Senator Bob Corker, a Tennessee Republican. The expectation that TARP will be there to bail them out has created “a little bit of moral hazard,” Corker said.

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Kent Hoover is the Washington bureau chief for bizjournals.