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Blog

    The Fallacy of TARP Profits

    10/25/2010

    Recently, the Obama administration has been touting that the Troubled Asset Relief Program or TARP—the massive $700 billion Wall Street Bailout—“saved” the economy and actually returned an 8.2 percent "profit".  Today, the New York Times reported that:

    This case was strengthened by the news that the bailout might actually end up costing the taxpayer less than $50 billion over all, rather than the $700 billion originally set aside to pay for it…As it stands, the federal government may actually end up turning a modest profit on the money injected into Wall Street’s failing banks.

    So TARP was a great success, right? No, of course not. As we’ve said from the beginning, TARP was a mistake that would likely do far more harm than good.  Before TARP was signed into law, FreedomWorks President Matt Kibbe wrote in Reason Magazine:

    My biggest fear is that the plan will do far more harm than good, even in the short run, by propping up poorly performing banks at the expense of well-run institutions ready and able to come in and clean up the mess. And, yes, as Warren Buffet could tell you, they hope to make a healthy profit doing it.

    During fall 2008, FreedomWorks was part of a surprisingly small group of principled free market groups who opposed the government bailout. Andrew Moylan of the National Taxpayers Union (NTU) was one of the few who joined us in speaking out against TARP from the start. In NTU’s blog, he explains the myth of the TARP’s “profit”:

    The banks that got bailed out through TARP shuffled all of their bad assets over to Fannie Mae and Freddie Mac, which got their own separate bailout.  So, really, it should be no surprise that they're relatively healthy.  They cut out the cancer and passed it right along to Fannie and Freddie.  The banks have issues with the current foreclosure mess, but the worst loans are no longer their problem, they're taxpayers' problem.

    As Moylan points out, Fannie and Freddie--which is to say the taxpayers--bought up most of the toxic assets from bailed out banks. Moreover, the pro-TARP Obama administration is attempting to hide the real cost of the TARP bailout. To date, Fannie Mae and Freddie Mac have put taxpayers on the hook for $135 billion.

    According to a new report released by the Federal Housing Finance Agency, the cost of bailing out Fannie and Freddie could nearly double. The cost of Fannie and Freddie will depend on the state of the economy. The government backed mortgage giants could end up costing taxpayers an additional $124 billion if the economy worsens.

    In the end, we were right. The entire Wall Street bailout has cost taxpayers billions while not improving the economy in the slightest. It surely has not improved the housing market or the job market—the unemployment rate stands at a high 9.6 percent. In fact, a Congressional Oversight Panel report says that “there is very little evidence to suggest that (TARP) led small banks to increase lending.”

    Just as we expected, TARP exacerbated the moral hazard problem.  If banks know they will be bailed out, they have more incentives to engage in high-risk and high-reward positions. If they succeed, they are rewarded by the market. If they fail, they are rewarded by the government through taxpayers. It’s a win-win scenario.

    Even Neil Barofsky, who is in charge of overseeing TARP,  noted in his quarterly report to Congress that banks were not held accountable for their actions. He stated:

    The firms that were 'too big to fail' last October are in many cases bigger still, many as a result of Government-supported and -sponsored mergers and acquisitions…TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behavior.

    President George W. Bush who signed TARP into law foolishly stated "I've abandoned free-market principles to save the free-market system.” However, the severe financial crisis was created by government intervention in the market in the first place. Instead, the solution is to allow the true free market to get us out of this mess. Let the failure of TARP be a lesson to all: government bailouts have negative consequences. Regardless of the circumstance, we must stay true to free market principles that promote freedom and prosperity.