Friday, June 29, 2012

Tarp Funds Not Repaid!

Despite what we often hear all Tarp funds have not been repaid. During the financial crisis the Troubled Asset Relief Program calmed markets and underpinned the US economy. The US Treasury claimed as recently as April that the Tarp program would make a profit, with the estimates of the profit in the range of 2 billion to 163 billion dollars over the next decade. The complexity of the program and repayment calculations has led to widespread debate in the US over whether taxpayers will see a return on Tarp, a recent report suggests otherwise.US taxpayers are unlikely to get all their money back from the 700 billion dollar bailout of the country's stricken banking and automotive sectors.

When it published its latest report to congress the Office of the Special Inspector General for Tarp said: "After three-and-a-half years, the Tarp continues to be an active and significant part of the Government's response to the financial crisis. "It is a widely held misconception that Tarp will make a profit. The most recent cost estimate for Tarp is a loss of 60 billion dollars. Taxpayers are still owed over 118 billion." Tarp said that many of the smaller banks rescued during the crisis are still struggling to repay Tarp bailout money. There are still 351 regional and community banks in the bailout programme.

Under Tarp , the Treasury Department took shares and warrants in firms drawing on bailout funds, these companies have to buy the stock back to exit the program. More than 700 banks were bailed out, and most of the major institutions have repaid money in full. But the weak US economic recovery and fragile business confidence has prevented many smaller banks from exiting Tarp. An additional problem is that after 2013 banks face an increase in the dividend they pay to the Treasury under Tarp . This will rise from 5% to 9%.
Some 95 of the banks still owing Tarp money have missed six or more dividend payments, Tarp said. This gives the Treasury the right to appoint directors to their boards, though as of March 31 it had done so at only nine banks.

We are at some point forced to again face the issue of  "Moral hazard."  When governments get involved in supporting private business or institutions where does it end? The report emphasises that Tarp is "more than just dollars and cents" and was vital to avert financial catastrophe. But it says that the rescue "is not without profound long-term consequences. A significant legacy of TARP is the increased moral hazard and potentially disastrous consequences associated with institutions deemed too big to fail. Getting these banks back on their feet without Government assistance should be a high priority.

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