Fisher Investments Editorial Staff
US Economy

One Less Four-Letter Word

By, 10/04/2010

Story Highlights:

  • The $700 billion bailout closed to new business on Sunday.
  • While vilified widely, the Troubled Assets Relief Program (TARP) showed some successes from a gain and loss standpoint.
  • Media claims of TARP single-handedly preventing a Great Depression II are overblown.
  • This chapter's closure is a plus for investor sentiment.

The massively controversial $700 billion bailout created at the financial panic's peak closed to new business on Sunday. Dubbed the Troubled Assets Relief Program (TARP), the fund has drawn the public's ire since inception—and in some respects, TARP has been much more successful (and far less costly) than many feared, but it was hardly a portrait of perfection.

Two years ago, pundits and politicians widely opined TARP was tantamount to throwing away hundreds of billions of taxpayer dollars to aid undeserving banks. However, Friday's reports showed the result was much less costly than the headline amount—less than 10% of the funds legislatively committed remain outstanding (and only about $400 billion of the full $700 billion was tapped). And the currently estimated $50 billion outstanding is tied principally to non-financial companies aided after inception (e.g., GM, Chrysler). Of the funds fronted to banks, only a small portion are realized losses—most of these "losses" are currently unrealized losses in positions still open today—meaning TARP's debit may be reduced further or even give way to profit if these positions gain market value. In operation, TARP was much like an American sovereign wealth fund—offering government capital through private placements to private companies seeking to raise funds in exchange for the chance to earn a return. And from the perspective of gain and loss, the program has clearly been more successful than many expected.

But let's not overstate the case—claims of TARP forestalling a Great Depression II lack credibility and rely on revisionist history. Ex-Treasury Secretary Hank Paulson sold TARP to the public using fear—claiming it was undesirable but needed and preaching doom if not passed. And if Paulson's dramatic sales pitch wasn't enough, TARP's continuously shifting mandate may well have roiled markets further. Initially, the plan was to rid banks of so-called "toxic assets" (mortgage-backed securities and collateralized debt obligations, principally). Only later did TARP enter the bank (and auto) recapitalization business.  

And we shouldn't forget TARP had significant help from the Federal Reserve, which exchanged "toxic" assets for cash. But while some "toxic" assets were problematic, more weren't. It was misguided mark- to-market accounting of these assets and a good, old-fashioned panic that were toxic. Notably, the Fed has profited on these "toxic" assets. And recall many banks didn't want or need TARP's capital. Whatever beneficial effect TARP had, it rather clearly didn't completely halt the market decline or recession. In fact, stocks reached their low five months after TARP passed—when Congress had hearings on mark-to-market accounting (FAS-157), ultimately resulting in its revision.

TARP's closure shuts another chapter on a dark period and ends the potential it might again morph into a government intervention slush fund. And due to its unpopularity, its closure below widely expected costs (if any, ultimately) could help improve investor sentiment moving forward.

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

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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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