It has been some time since Henry Paulson forced the Troubled Asset Relief Program (TARP) through Congress. In a power grab unprecedented in U.S. history, Paulson asked for $700 billion to purchase mortgage-related assets defined as "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages."

In his initial four-page Congressional request, he requested this authority with no strings and absolutely no liability for him or his staff if things went wrong:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

And even though the bill that ultimately passed Congress ended up being 96 pages, Paulson got what he wanted: an appropriation of $700 billion to spend however he chose.

TARP is no longer on the front burner as the U.S. administration tries to generate jobs, deal with the oil spill, and manage two Middle East wars. But what happens with the TARP program is important because $700 billion is a lot of money. Recognize that among Federal Government departments, only Defense has an annual budget of more than $100 billion at $664 billion, with Health and Human Services at $79 billion the next highest.

A TARP Overview

Table 1 provides a summary of TARP actions to date. While the provision of funds to banks (CPP) is by far the largest disbursement activity of TARP, the auto industry now has the largest outstanding balance.

But it takes a large bureaucracy of high-priced professionals to implement TARP. TARP has contracts with 22 law firms, 15 financial organizations, and 28 other firms to help with implementation. To date, TARP's operating expenses have been $1.15 billion. Its monthly expenses are now running at about $133 million.

Capital Purchase Program (CPP)

Paulson originally planned to use TARP to buy up mortgage-backed securities. He ended up deciding to make the primary activity of TARP the Capital Purchase Program. Under CPP, Treasury would pay money to banks. In return, banks would pay dividends on the outstanding balance at 5% for 5 years (9% in later years). In addition, the banks would issue warrants to Treasury.

So far, CPP has disbursed $204.9 billion. These disbursements have generated $9.6 billion in dividend payments and $5.9 billion in warrant proceeds. It has lost $2.3 billion on the CIT bankruptcy and another $4.1 million on the collapse of the Pacific Coast National Bancorp. (Treasury and FDIC - talk to one another!). Taken together, these investments have therefore generated a net $13.2 billion or a 6.4% return.

Treasury is trumpeting the money it is making on its Citicorp CPP $25 billion disbursement. In return for this, Treasury got 7.7 billion shares of the company. This works out to an average price of $3.25 per share. Recently, it hired Morgan Stanley to sell some Citi shares. So far, it has sold 2.6 billion shares at an average price of $4.03. Assuming Morgan Stanley is taking a 3% commission on the transaction, the net to Treasury would be $10.2 billion for a profit of $1.7 billion. Assuming Treasury can get the same price for its remaining 5.1 billion shares, it should net $5 billion overall. That would up the CPP return to 8.9%.

Repayments on the disbursed capital have been $138.8 billion (68%). One gets a very different picture if one looks at the number of banks that have repaid rather than repayment totals. Of the 746 bank agreements entered into, repayments have been made on only 94 of them. That means 652 banks (87%) have made no repayments.

There are strong incentives for repayment:

  • 5% money is expensive money for banks and
  • compensation for bank officials is tightly regulated under CPP until repayments are made.
  • That means the banks that have not repaid are in financial trouble. The banks with outstanding balances of more than $500 billion are given in Table 2.

    Legacy Securities -- Term Asset-Backed Securities (TALF) and Public-Private Investment Program (PPIP)

    These programs were designed to revitalize the asset-backed market by purchasing such assets. TALF was administered by the New York Fed and made a total of $70 billion in loans. It stopped making loans in June.

    PPIP is the Treasury program. To qualify, companies had to raise $500 million in equity. Treasury matched that amount and offered a loan equivalent to the equity raised. It should be a real money-maker: buy troubled assets at their low point with leverage.... Warren Buffett was looking to get in. Indeed, some wonder why the government should be involved.

    Table 3 provides current data on PPIP.

    Part 2 of this series will cover the other TARP components. It will also provide an overall assessment of the program.
    Elliott Morss is an economic consultant and an individual investor in developing countries. He has taught at the University of Michigan, Harvard University, Boston University, among other schools. Morss worked at the International Monetary Fund and helped establish Development Alternatives Inc. He has co-written six books and published more than four dozen articles in professional journals.