Tarp repayment: Will the Troubled Asset Relief Programme wind up as a piece of public policy that actually makes a buck? That’s not what it was expected to do, despite official assertions to the contrary. The primary aim of injecting capital into the largest US banks was to restore faith in the financial system – a mission that it has largely accomplished.
Yet with the first of those investments now winging their way back to the Treasury, taxpayers look so far to be making a decent return. But that’s no reason for the government to go easy on the financial industry.
Uncle Sam still has some $130 billion worth of banks’ preferred shares, some of which – like those it bought from Citigroup – will become common equity as laggards fail to raise private capital. And then there are the tens of billions committed outside of the Capital Purchase Programme to companies like AIG that need to be accounted for.
To remain consistent with former Treasury boss Hank Paulson’s assertion to Congress that Tarp was “an investment, not an expenditure,” the Obama administration must hold firm in negotiations with the banks to cash out of warrants that were also issued to give taxpayers some upside in return for their aid.
True, the initial results are encouraging. The firms given the green light to pay back $68 billion of preferred stock - JPMorgan, State Street, Morgan Stanley, Goldman Sachs, BB&T, Capital One, US Bancorp, Bank of New York Mellon, Northern Trust and American Express – have paid dividends equal to an annualised 5 per cent.
Since the government was borrowing one-year money at 1 per cent in December when it rolled out Tarp, that’s an investment spread of around 4 percentage points, though a proper return benchmark, given the risks involved, would probably be closer to 10 per cent. Moreover, these are arguably the healthiest of the bunch, certainly of the financial institutions that were subjected to a series of stress tests last month.
The Treasury still holds preferred shares in nearly 600 financial companies as part of the CPP, including some $50 billion it plugged into Citi alone. Many of these investments may yet come a cropper, while equity holdings like those in Citi and GMAC may take years to exit. The government has also committed $180 billion to AIG.
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With so much still at stake, it wouldn’t take much for Tarp’s return to slip into the red. That’s all the more reason for Tim Geithner to ensure that the Treasury department he runs gets a fair shake when the banks seek to repurchase their warrants. So far, it hasn’t.
While the few billion it stands to gain from insisting on fair market value won’t offset the billions it may lose elsewhere, every penny counts.