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TARP Bailout Program

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Bankers who took the bailout

(L-R) Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon, Bank of New York Mellon CEO Robert Kelly, Bank of America CEO Ken Lewis and State Street CEO Ronald Logue

Photo: Chip Somodevilla/Getty Images
Bernanke and Paulson

Federal Reserve Board Chairman Ben Bernanke (R) testifies before the Senate Banking, Housing and Urban Affairs Committee as U.S. Treasury Secretary Henry Paulson watches on Capitol Hill September 23, 2008 in Washington, DC.

Photo by Chip Somodevilla/Getty Images

Definition: The Troubled Asset Recovery Program (TARP) had its roots in the October 2008 bank bailout bill. Then Treasury Secretary Hank Paulson's original idea was to set it up as a reverse auction. Banks would submit bid prices on their toxic mortgage-backed securities to the Treasury Department. Treasury administrators would select the lowest price offered. The banks didn't want to take a loss, so they wanted Treasury to pay full price for these assets. The government knew they were worth far less. Ultimately, this reverse auction was unworkable, so the plan was shelved.

That's when the bailout bill became TARP. Treasury initially used $105 billion of the $700 billion authorized by Congress. It bought preferred stock in eight banks: Bank of New York Mellon, Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America/Merrill Lynch, Citigroup, Wells Fargo, and State Street. This Capital Repurchase Program required banks to give the government a 5% dividend that would increase to 9% in 2013. This encouraged banks to buy back the stock within five years. Paulson knew the government would make a profit, as bank share prices would be higher by then.

In addition to the eight banks, TARP funds were used to either buy preferred stock in, or make loans to:

An additional $20 billion of TARP was loaned to the Federal Reserve TALF program. Congress only approved half of the $700 billion bill to be used in 2008. The remaining $350 billion was never used. (Source: Treasury Dept.)

President Obama wanted to tax banks to repay taxpayers for $120-$141 billion he thought they would lose from TARP. Obama planned to levy the tax over 10 years on the banks' riskiest activities, such as trading, and not on their retail operations, which would get passed on as higher prices to customers.(Source: HuffPo, Obama to Push Tax on Too Big to Fail Banks)

How Was It Paid For?

In FY 2009,the government spent $150 billion to rescue troubled banks. In FY 2010, banks paid back $110 billion and another $38 billion in FY 2011. In other words, TARP actually provided a surplus to the budget as banks paid back the bailout.

TARP used $35 billion in FY 2012 for programs to help homeowners modify mortgages and avoid foreclosure. This was part of the Homeowner Affordable Modification Program, or HAMP. In FY 2013, TARP budgeted $12 billion for HAMP.

How Much Did TARP Cost Taxpayers?

In May 2009 Bernanke said that the results of the banking system's "stress tests" were encouraging. The tests found that 9 of the country's 19 largest banks did not need to raise additional capital to offset future write-downs of toxic mortgage-backed securities (MBS). Some banks are already willing to repay the government funds they borrowed through TARP last fall. The stress test confirmed that Capital One, U.S. Bancorp and BB&T Corp. are healthy enough to sell shares to repay TARP funds.Goldman Sachs had already offered to pay back $5 billion it borrowed.

Two banks - Bank of America and Wells Fargo - were responsible for one-third of the $75 billion that needed to be raised. Bernanke was encouraged because Wells Fargo was able to easily raise $8.6 of the $13.7 billion it needed through last week's sales of additional common stock. In addition, the tests showed that losses from the 19 banks through the end of 2010 would not be more than $950 billion. It also appeared the banks would not need more federal funds. (Source: Bloomberg, Bernanke Encouraged by Banks' Plans, May 11 2009; LA Times, Banks' Stress Test Results Hint at Recovery, May 8, 2009)

Five years later, all the big banks had paid the government back with interest. In total, $204.9 billion in TARP funds were used to help 700 banks. Of those, 226 banks repaid the funds, Treasury sold its stake in 177 banks, 26 banks failed anyway, and 165 were transferred to other government programs. As a result, Treasury has recouped $207.1 billion in principal and interest, so far creating a $2.2 billion profit for taxpayers. However, Treasury expects to lose an additional $4.5 billion thanks to write-offs.

In addition, about $2.75 billion is still owed by 113 smaller banks that are still struggling. This is becoming a crisis for many of them, since the interest payments are now set to nearly double to 9%. The banks are in trouble because they a lot of local commercial real estate loans. These loans to strip malls, apartment complexes and office buildings defaulted after the first wave of subprime mortgages. Retailers especially had trouble when people moved out or went bankrupt. The smaller, local banks were left holding the bag long after the bigger banks had recovered.

It's possible that 79 of these banks won't pay the government back at all, since they are behind on their payments. If that happens, taxpayers will be out $217 million. That's in addition to the $585 million in losses incurred already. Treasury sold its holdings in 151 banks at a discount to private investors, such as hedge funds and private-equity firms. (Source: WSJ, Some Smaller Banks Still Owe TARP Money, September 2,3 2013) 

Banks Blocked the TARP Program for Homeowners

The HARP (Homeowner Affordable Refinance Program) would help stimulate the housing market and economy by allowing credit-worthy homeowners who are upside-down in their homes to refinance from the lower mortgage rates. Now here's a great program that wouldn't increase the deficit, pump billions into the economy and was designed to help 2 million homeowners. If expanded, it could help all 25 million homeowners who are upside-down in their mortgages. Why isn't it working? Because banks are just too risk averse, according to Bloomberg.The Obama Administration introduced HARP in April 2009, but only 810,00 homeowners have been helped. Of these, only 57,171 were more than 5% upside down. The rest had higher equity. Banks are cherry-picking applicants, and refusing to consider those that had worse equity. These are the same banks that would give loans to anyone just a few years ago.

There's really no risk to the banks, as all these loans are guaranteed by Fannie Mae or Freddie Mac. Banks don't want to be bothered with the paperwork involved with homeowners who have mortgage insurance. This, of course, applies to everyone with less than 20% equity.

By reducing costs for homeowners, the HARP program would help prevent potential foreclosures. Even credit-worthy homeowners can lose a job. Record-high foreclosure levels have created a backlog, known as the shadow inventory, that's hanging over the housing market, holding down prices and demand. Anything that reduces foreclosures would help get the economy moving again.

With all the billions in TARP funds used to bail out banks, it would be great to see more participation in this TARP program for homeowners. By the way, if any readers are bankers, I'd love to hear your comments below. Maybe there are legitimate reasons of which I'm unaware.

Meanwhile, If You're Facing Foreclosure

The Treasury Department has a program called MakingHomeAffordable that works with Fannie Mae and Freddie Mac to help you prevent foreclosures. I've heard many complaints about it from readers, but it's worth a try.

The Federal Reserve also has a consumer help web site. Here's where to go to report a bank that has been unfair or misleading, discriminated against you in lending, or violated a federal consumer protection law or regulation. Article updated September 24, 2013

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