A recent CBO report put the final cost of TARP at $25 billion, which certainly could be seen as a win given that up to $700 billion was initially put on the line (though it didn't all go to th banks). But is that the real cost? According to The Wall Street Journal, a congressional panel that was put together in order to ensure the bank bailout was properly run recently concluded that while the program "provided critical support to markets at a moment of profound uncertainty" it also distorted financial markets. This in and of itself is a cost, a future cost, but a cost nonetheless. If Treasury or FDIC winds up bailing out a bank again in the future—despite Dodd-Frank—that cost should be blamed in part on the moral hazard created by TARP.
What other costs are not being accounted for? Paul Atkins, Mark McWatters and Kenneth Troske—former and current commissioners on the TARP oversight panel—noted a few in a recent op-ed.
- Creative accounting understates losses: "The Special Inspector General for TARP criticized Treasury in October for inadequately disclosing a change in its valuation methodology that reduced a $45 billion loss in AIG to $5 billion, making TARP losses appear smaller than they really are. This data manipulation is only part of a much larger problem with Treasury's representations regarding the supposed success of the bank bailout payments that lie at the heart of TARP."
- The GSE bailout is preventing MBS losses at TARP banks: "TARP banks own billions of dollars worth of MBS and have remained liquid in part because the Federal Reserve has bought more than $1.1 trillion of these GSE-guaranteed MBS in the securities markets—all outside TARP. The Fed purchased the MBS at fair market value, but this value reflects Treasury's bailout and continued support of the GSEs—also done outside of TARP with taxpayer money. Had the GSEs failed, TARP recipients probably would have been stuck with these MBS, writing them down at significant loss. Their ability to pay back TARP funding would have been hurt, and they might have had to obtain more TARP funds or go bust."
- Other programs that prop-up the financial system are preventing losses: "The focus on repayment fails to consider the huge taxpayer costs from non-TARP programs that directly and indirectly enabled many of the large banks to repay their TARP funds. These intertwined programs, operated by the Treasury and the Federal Reserve, dwarf the size of TARP and lack its accountability... Any evaluation of TARP's success must take into account the interaction among all government programs designed to prop-up the financial system, and the shifting of costs among these programs."
- Larger banks than before have created even great system risk threats: "Creating larger, more systemically important financial firms increases the likelihood of future financial crises because these firms have an incentive to invest in riskier projects as a result of the implicit government guarantee. The additional costs borne by consumers in the form of higher prices for financial services and the additional costs that result from future financial crises need to be included in any accounting of the costs of the TARP."
Read the rest of the piece here.