The return of the TARP

Thu, 21 Oct Pre-Open

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TARP. This acronym could perhaps never be erased from the memories of the average US taxpayer. A couple of years back, there wasn't a single day which passed by without the mention of the term in the financial media.

In case one has forgotten, TARP was put into place by the US Government so that some of the largest banks in the country could be saved from an unmitigated disaster. It was the money given to the financial institutions to enable them to crawl out of a deep, deep hole.

Bloomberg reports that two years after the event, the US taxpayer has ended up earning some good returns. As per the firm, the Government has earned some US$ 25.2 bn on its investment of US$ 309 bn in banks and insurance companies. This equates to a little more than 8% returns over two years.

For the record, this 8% returns beats US treasuries, high-yield savings accounts, money market funds and certificate of deposit. In other words, where there was a fear that TARP would be a big failure, it has actually ended up earning returns higher than most asset classes. It should also be noted that the money earned through TARP is enough to fund the US capital market watchdog SEC for the next two decades.

But isn't this an extremely narrow way of looking at things. Surely, the TARP investment has made good returns when one considers just the TARP money. But what about the other costs that the US taxpayers had to incur.

Please bear in mind that the financial institutions were able to make money post TARP only because they were able to borrow money at near zero rates from the US Fed and lend at very attractive rates. In other words, the interest rates were subsidised and that too, by none other than the US taxpayer. Bloomberg estimates that taxpayers had to forego US$ 350 bn worth of interest charges per year because of the low interest rate policy of the Fed. Hence, this cost also needs to be taken into account.

Furthermore, the Government and the US Fed's risk taking moves weren't restricted to TARP alone. They took on lot more risks and thus, put into action a lot more money than what is reflected in the TARP. As per estimates, the total money that was plowed into the financial system amounted to as much as US$ 19.4 trillion. And that is indeed a mindboggling figure.

Thus, even if one tenth of this figure is assumed, the returns that have been generated can be considered nothing but a pittance. Little wonder, the bailout of the US financial system is considered to be one of the biggest frauds ever thrust upon the US taxpayer.