The Subsidies in TARP

by Donald Marron

Saturday, June 27, 2009 at 02:24 AM EDT

How much is TARP costing American taxpayers? We know that Congress originally authorized up to $700 billion in TARP investments. And we know that $439 billion has been committed to various programs. But how much of that money are taxpayers likely to see again? And to what extent will they be compensated for making those investments?

The Congressional Budget Office took a crack at answering those questions in a report released last night. The headline finding is CBO’s estimate that subsidies in the TARP program are $159 billion. Taxpayers put up $439 billion and, in return, now own assets (including recent repayments) worth $280 billion.

The following chart shows the estimated value of the TARP portfolio (dark red) and subsidies (light red) across the major TARP programs:

Key insights from the chart:

• The biggest subsidies are for housing ($50 billion), the auto industry ($40 billion), and AIG ($35 billion).

• The next biggest subsidy is for the bank investments that haven’t been repaid ($24 billion). That figure includes subsidies for the original TARP investments in Citigroup and Bank of America.

• CBO estimates that the additional investments in Citigroup and Bank of America involve subsidies of about $7 billion, of which $5 billion is for Citi and $2 billion is for B of A. The B of A figure may increase, however, when Treasury finalizes a plan to guarantee some B of A assets.

• CBO estimates that the banks who have repaid the TARP also received small subsidies. Taxpayers got their money back, but CBO believes that they weren’t fully compensated: dividend yields were below market rates, and taxpayers bore significant risk. (Caveat: CBO’s estimate does not include the value of the warrants that ten big banks will repurchase.) For additional information on the repayments, see this post.

• These estimates do not include several programs that have been announced but not yet implemented. These include additional support to GM, expansion of the TALF, creation of the PPIP, and support for small business loans. For additional information on these programs, see this post.

Another way to examine this information is to look at the subsidy rates that CBO estimated for each of these programs:

Key takeaways include:

• The subsidy rate for housing is 100%. The housing program is the only part of TARP in which taxpayers do not receive assets whose value might offset some of the TARP spending.

• The next highest subsidy rates are for the auto industry (73%) and AIG (50%).

• The subsidy rate for the extra Citigroup support (20%) is almost twice as high as the subsidy rate for the extra Bank of America support (11%). That difference is primarily driven by the asset guarantees provided to Citigroup, which CBO believes involve higher subsidies that the additional capital investment in the firm. Treasury is working on a plan to provide guarantees for some Bank of America assets, so the BOA subsidy rate may change.

• As noted above, CBO believes that the repaid investments involved a small subsidy. Taxpayers got their money back, but weren’t fully compensated for bearing risk and receiving below-market dividends. This figure may change once Treasury repurchases warrants.

Random Fact: Congress originally authorized up to $700 billion in TARP investments. CBO reports, however, the current limit is about $699 billion; the total was reduced by $1.3 billion in a subsequent law.

Disclosure: I have no investments in any TARP recipients except Citigroup. As research for my continuing series on the Citigroup anomaly (latest installment here), I am currently long a small amount of Citigroup preferred and short some call options on the common.