Pulling Back (the) TARP

Just over three years have passed since the bottom of the financial crisis-driven bear market. And as we’ve noted, much progress has been made: The US economy’s grown for 10 consecutive quarters, global stocks are up 102.4%*and banks—the nexus of the crisis—seem far healthier.

But one thorny 2008-born remnant remains—the Troubled Asset Relief Program (TARP). TARP, known as “the $700 billion bailout,” clearly has a checkered past. The government’s stated goal was to provide liquidity and, thereby, market confidence to stoke bank lending—the lifeblood of the economy. The means? Through the Capital Purchase Program (CPP)—TARP’s bank bailout segment— to buy bank “troubled assets,” namely, securitized debt. However, that didn’t happen. Instead, the government bought preferred shares and warrants in banks (sometimes against banks wishes.)

TARP’s introduction had a fair few detractors. Among major fears of the day was the notion TARP would amount to the US government funneling cash into banks that ultimately would disappear into a gigantic void. But that fear has yet to be realized. In fact, it should be basically erased as a product of the results. For example, the Treasury announced Wednesday it would unwind its investments in six participating banks purchased through the CPP—auctioning preferred shares of the companies to the public. While we won’t know the outcome, successful or not, until the end of the month—this is another marker in the road to putting TARP in the rearview. In fact, a large part should already be in the rearview: The CPP’s $245 billion initial investment has already been recouped—plus about $14 billion in government profits, stemming largely from warrants sold, dividends and interest earned and more. So assuming the government reaps something at the planned dutch auction of those six banks later this month, that would simply be additive to the CPP’s earnings already.

Now, that doesn’t mean all the banks have completely repaid what’s owed. It just means the total sum invested by the CPP has been recouped. Including the six banks mentioned above, 361 banks still owe some measure of funds--the vast majority being small, community-oriented lenders who’ve generally had more trouble raising capital and encountered greater difficulty due to matters specific to local markets.

Of course, that only covers the CPP portion—the bank bailout. As of March 15, TARP in total has recovered $331 billion of the $414 billion the program disbursed. The sticky matters of AIG, homeowner aid and automakers remain. But there’s been news on those fronts too. Late last week, the US Treasury announced it would divest about $6 billion of derided insurer AIG. The move reduces the Treasury’s stake in the company from 77% to 70% (and down from a peak of 92%.) To boot, AIG’s been at least successful enough in capital raising to buy back $3 billion of the government’s shares itself.

Many opinions remain—and some criticisms of TARP seem rather valid, in our view. But despite fears to the contrary, what actually seems to have resulted from the CPP was government buying low and selling somewhat higher. (Though we’d note that wasn’t the government’s stated objective. Nor does it mean taxpayers are profiting, which would imply we’d all have a check in the mail.) All in all, what we take from the CPP being in the black—and not a black hole—is it’s a noteworthy marker signifying how much has actually changed from those dark days of 2008.

*MSCI World Index (Net Return), from 03/09/2009 through 03/14/2012. Source: Thomson Reuters.