Every 60 days the Government Accountability Office issues a report on the various TARP programs. Each report looks at how the Office of Financial Stability, the body currently overseeing all TARP programs, is performing on a given metric. The latest report looks at the estimated lifetime costs to U.S. taxpayers of the programs still in operation, and also at how the Treasury communicates these costs to the public. As for this latter question the short answer is: very selectively, indeed.
The following are some notable facts re the lifetime costs for some of the programs that are still up and running.
- Calculating the lifetime taxpayer cost is more of an art than a science.
Well, duh. To calculate the cost of loans and loan guarantees the Treasury, the Office of Management and Budget and the Congressional Budget Office project what the future cash flows might be and then use “an interest rate adjusted for market risk” to arrive at the net present value. Cash flows that have already occurred (dividends, debt repayments) are discounted using the Treasury rates. The amounts, known as “lifetime subsidy costs” are updated every year to include estimated changes in future performance. Administrative, personnel (the Office of Financial stability currently has 198 employees) and travel costs are not included.
- The largest program, the CPP, is projected to return a lifetime subsidy gain.
The Treasury spent over $200 billion buying preferred stock, common stock, warrants and subordinated debt in “financially viable” financial institutions. They project that this program will ultimately create income of $13 billion. However, this comes with a huge caveat: the number of financial institutions that have missed at least one scheduled dividend or interest payment rose by almost 40% from the end of 2010 to the end of 2011. There are still 390 institutions remaining in the program and the exit date is “unknown”. This speaks to a basic issue with calculating the true cost of all the TARP programs — even if a program does not result in a “loss”, are taxpayers adequately compensated for putting their capital at risk in this manner? Particularly when we consider what these funds might have been spent on, instead?
- None of the community- and development-oriented financial institutions has repaid the funds provided under the Community Development Capital Initiative.
This is a distinct program for which the Treasury spent $570 million buying preferred shares and subordinated debt from 84 Community Development Financial Institutions (CDFIs) that “provide financing and related services to communities and populations that lack access to credit, capital, and financial services.” Although the Treasury did receive $10 million in dividends, none of the CDFIs had repaid the original invested amount as of the end of last September. On top of that, Treasury thinks that the final lifetime cost will be $182 million, or a whopping 32% of the original amount because the Treasury cut the CDFIs a break by 1) requiring lower dividend amounts and 2) not taking warrants.
- The investments in the General Motors and the former GMAC are in deep trouble.
Chrysler and Chrysler Financial repaid their bailout, but GM and the entity now known as Ally Financial have not been as lucky. We paid $37.3 billion for the preferred and common stock that we still hold from these two but, as of the time of the report, the market value was only $17.8 billion outstanding commitments. The ultimate lifetime cost is estimated to be $23.6 billion. And the timeframe for exiting these investments is highly uncertain; Ally Financial’s continuing mortgage problems make it look particularly doggish. GM is less so, but its share price would still have to rocket by more than 60% from the 2010 IPO figure for the Treasury to break even.
- Same goes for AIG.
They and their clueless chairman still owe U.S. taxpayers $51.1 billion. The total estimated lifetime cost is $11.5 billion, and low interest rates and a volatile market for insurance shares combine to make an exit highly uncertain.
- The mortgage modification programs — which essentially consist of Treasury writing checks to servicers, investors and borrowers modifications– will be deep in the black.
Because no one’s using them. Less than 900,000 people will be assisted via the $45.6 billion made available, vs. Treasury’s initial goal of 3 to 4 million. Why’s that? Yves Smith of Naked Capitalism has covered this extensively, and writes that the
plan will at best provide only modest help to homeowners. And in some cases, it will worsen their position. In some states, a purchase money mortgage is non-recourse. In all state, my understanding is a refi is recourse with only narrow exceptions.
It will have virtually no impact on the housing market because it will keep loan balances at the same inflated levels. Similarly, it will not contribute in any way to new construction.
- TARP has been a windfall for financial service providers, especially for Fannie Mae and Freddie Mac.
The Treasury’s contracts with providers for services such as asset management, transaction structuring, custody, etc. had a value of over $702 million from TARP’s inception through the end of 2011. About $383 million of this went to Fannie and Freddie for administering the mortgage modification programs. From 2010 to 2011 total costs paid to all service providers went up by a whopping 61%. While the GAO report shows the top 5 service providers (accounting for $476 million of the $702million), I’d love to see a complete list of all those feeding at the trough. For example, the report mentions elsewhere that a company called EARNEST Partners was an advisor for one of the TARP programs. Information from Public Citizen reveals that the CEO of EARNEST, Paul E. Viera, contributed $28,500 to Obama’s campaign in 2008. We don’t know if the two facts are necessarily linked, but a lack of transparency can lead to all sorts of uncomfortable questions being asked.
- And, finally there’s the “costs of moral hazard” fudge:
The GAO says:
While Treasury can measure and report direct costs, indirect costs associated with the moral hazard created by the government’s intervention in the private sector are more difficult to measure and assess.
An assertion with which I don’t agree: thanks to some fantastic research we now know a very good idea of the costs of moral hazard. This earlier post discusses just that.
As for how the Treasury chooses to communicate the varied performance discussed above — well, let’s just call it the Sunshine and Truthiness Strategy. The emphasis is mine:
[I]t appears that over the last 2 years Treasury has included lifetime cost estimates in some of its program-specific press releases for programs expected to result in a lifetime income, while excluding these estimates for programs expected to result in a cost for taxpayers.
For example, Treasury issued a press release in June 2011 that described its sale of several SBA 7(a) securities. Treasury stated that the sale resulted in overall gains and income. The content of this press release implied that the program had earned a significant amount of money but did not provide the more comprehensive lifetime cost estimate for the program, which was $1 million at that time. In addition, over the last 2 years none of Treasury’s press releases for AIG and AIFP (programs expected to cost approximately $24.3 billion and $23.6 billion respectively, as of September 30, 2011) have included the lifetime cost estimates associated with the programs.