Final Arguments

Was TARP a success or failure? It depends on who you think it was supposed to help.

George Bush. Click image to expand.
President Bush signs the bailout bill

On Oct. 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act into law. Just two weeks before, the investment bank Lehman Bros. had collapsed, sending the financial markets into a panic. The entire economy teetered on the brink, with bank failures, business shutdowns, and massive unemployment looming. To keep that disaster at bay, the Federal Reserve and Congress needed to fix finance first. The bill became known as the “bailout bill,” and its most famous provision was the Troubled Asset Relief Program, or TARP.

Now, 30 months later, TARP is in the process of winding down. Depending on who’s assessing it, it is either one of the most successful government responses to an economic crisis or one of the least. “It isn’t often that the government launches a major program that achieves its main goals at a tiny fraction of its estimated costs. That’s the story of TARP,” Washington Post columnist Robert Samuelson wrote this week, calling the program a “success story.” Yet Neil Barofsky, the special inspector general for the program, wrote just the opposite in the New York Times, calling portions of the program a “colossal failure” and saying the Treasury Department refused to acknowledge or fix its mistakes.

Can they both be right? To help answer that question, it helps to ask who benefited from TARP, and who was supposed to have benefited. You get no sense from its inelegant title, which promises “relief” from “troubled assets” but fails to note who that relief will be provided to. If you think the financial sector was supposed to get relief, you fall in Samuelson’s camp. If you think homeowners were as well, you fall in Barofsky’s.

For banks and insurers, TARP worked just as planned—better than planned, even. The goal was to stabilize financial institutions and to get banks lending again. The Treasury Department did this in a number of ways. It offered cheap loans to vetted investors willing to buy mortgage-backed securities and other assets. It also let companies temporarily trade equity for cash, bolstering their balance sheets. To help taxpayers avoid any losses, participating firms needed to give the Treasury warrants or stock as well. And though the program is derided as a “bailout,” companies were required to make the government whole, plus interest.

It sounds complicated, and it is. But the alphabet soup of programs worked. Consider the case of insurer Lincoln National, based in Radnor, Pa. It got $950 million in cash via TARP and repaid the government in less than a year. “We always viewed [the program] as a temporary cushion to be returned as soon as market conditions warranted, and we are pleased to repay the funds sooner than originally anticipated,” CEO Dennis Glass said at the time, noting that taxpayers made “attractive returns” on the deal.

But CDOs and other exotic derivatives were not the only “troubled assets” in America in 2008 and 2009. For many Americans, their most valuable asset—their home—was also in trouble. The burst of the housing bubble left tens of millions of Americans paying off home loans worth far more than their homes—meaning even if those Americans managed to sell their properties, they would still owe the bank. Then, when unemployment reached double digits in 2009, millions of Americans suddenly lacked the resources to pay any mortgage at all.

Congress wantedTARP to provide relief to these folks as well. It was supposed to provide relief to these folks. Reporting on TARP’s progress to Congress, Neel Kashkari, who oversaw TARP, cited preserving homeownership as a major goal, saying the program “will look for every opportunity possible to help homeowners.” But by many measures, it fell short.

In 2009, the Treasury Department launched its acronymic homeownership-preservation program, HAMP, the Home Affordable Modification Program. It sought to keep families in their homes by negotiating lower monthly payments for people paying more than 31 percent of their income to their mortgage. Initially, the administration said HAMP would help 3 million to 4 million homeowners. So far, only 633,000 families have actually gained permanent loan modifications, with about 800,000 kicked out during the program’s “trial period.”  In some cases, the banks’ own modification programs have proved better than the government’s.

Thus, it has won few supporters outside of Treasury. Rep. George Miller, D-Calif., called it an “arbitrary, capricious system that kicks hard-working people out on the street.” Barofsky said there is “universal and bipartisan agreement that the HAMP program is failing to meet TARP’s goal of preserving homeownership.”

So where does that leave us? On the one hand, TARP did stabilize financial institutions, helping—along with the Federal Reserve’s emergency-lending programs, the stimulus bill, and other Treasury programs—to avoid economic catastrophe. Moreover, it did so at no cost. When TARP first arrived on the scene, the Congressional Budget Office anticipated its price tag at $300 billion. This week, TARP’s bank programs actually moved into the black. When all is said and done, taxpayers stand to make about $20 billion.

But that hardly means everyone likes it. There is the failure to stem the foreclosure crisis. There is the worry that by aiding failing institutions, Treasury reduced moral hazard and left too-big-to-fail companies standing. There is the concern that the government ended up bolstering the companies responsible for the crisis, rather than people caught in it. The court of public opinion has long since spoken on the Bush-era, Obama-administered program. In a Bloomberg poll from October, only 24 percent of respondents said TARP helped. So maybe we cannot agree whether TARP was a success or a failure. But no one can argue that it was, is, or is likely ever to become popular.