Fisher Investments Editorial Staff
US Economy

Not-So-Toxic TARP

By, 01/25/2011

Story Highlights:

  • Preliminary reports show the US Treasury's eight "toxic asset" funds have gained about 27% since inception. 
  • Turns out those "toxic assets" weren't so toxic after all—they were just hugely illiquid and became massive liabilities because of FAS 157, the "fair value" accounting rule. 
  • Overall, the costs associated with the massive $700 billion bailout will be much less than originally estimated—with some programs even turning a profit. 


This past Monday morning brought a bevy of good news, from positive jobs outlooks to continued economic growth in the eurozone. Additionally, on the financial front, preliminary reports indicate the US Treasury's eight toxic asset funds have gained about 27% (rising roughly $1.1 billion to $6.3 billion) from inception to the end of 2010.


The funds were part of the government's $700 billion bailout program (better known as the Troubled Asset Relief Program, or TARP), set up to buy illiquid mortgage-related securities from banks using a combination of private capital and cheap government financing and run by Wall Street private managers. The goal was to bolster ailing US banks by removing these so-called "toxic assets" from balance sheets and infusing them with new funds to make loans, as well as boosting demand for these assets on secondary markets.


Ironically, many banks were able to raise the funds they needed in private equity and debt markets, and the funds have used only $5.2 billion of government financing—the Treasury initially proposed buying up to $1 trillion in "toxic assets." As we've said before, and time so far has told, many of these assets weren't so "toxic" as much as just hugely illiquid. And due to FAS 157 (the "fair value" accounting rule), they became massive albatrosses since financial firms were required to value these assets as if they had to be liquidated overnight—even if the institution had no intention of selling the asset immediately (which was most frequently the case). As a general concept, mark-to-market may be fine for liquid assets, but for more illiquid assets not meant to be traded frequently (like mortgage-backed securities) FAS 157 was devastating—creating a rare, near-self-perpetuating cycle of asset write-downs at fire-sale prices contributing directly to 2008's credit crisis and big bear market. Thankfully, the Financial Accounting Standards Board has softened some of FAS 157's requirements.


But note: Though the "toxic asset" funds were born thanks to government money—thus, to some extent, taxpayer money and are now turning a profit—this doesn't mean the profits will be handed back to taxpayers, even though reporting on these funds frequently insinuates "taxpayers are profiting." There's not really a mechanism where that can directly happen, say, in the form of a rebate or a tax voucher (though that would be nice). Instead, the profits go to the Treasury and to the private investment managers for taking on the risk. (That's not saying they are bad or we don't want them to profit—just that folks shouldn't be waiting for checks to arrive in the mail.)


Overall, many of the programs associated with 2008's huge financial bailout ended up costing much less than originally estimated—with many programs even turning a tidy profit—likely because the root cause of the credit crisis was less systemic and more sentiment (and rotten accounting rules).

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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