The Subsidies in TARP
Saturday, June 27, 2009 at 02:24 AM EDT
How much is TARP costing American taxpayers? We know that Congress
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
released last night. The headline finding is CBOâ€™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
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 havenâ€™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
werenâ€™t fully compensated: dividend yields were below market rates, and
taxpayers bore significant risk. (Caveat: CBOâ€™s estimate does not
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
- 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 werenâ€™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.
This article originally appeared on Donald Marron.