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U.S. watchdog doubts TARP will turn a profit for taxpayers

Christy Romero, the special inspector general for the bailout fund, says it's a 'widely held misconception' that it will make money.

April 26, 2012|By Jim Puzzanghera, Los Angeles Times
  • Christy Romero, special inspector general for the Troubled Asset Relief Program, and her predecessor, Neil Barofsky, have been highly critical of the way the Treasury Department has run TARP.
Christy Romero, special inspector general for the Troubled Asset Relief… (Andrew Harrer, Bloomberg )

WASHINGTON — The government's watchdog for the $700-billion Troubled Asset Relief Program disputed suggestions the bailout fund would turn a profit for taxpayers and warned that many small banks are still struggling to repay.

"It is a widely held misconception that TARP will make a profit," said a report by Christy Romero, the special inspector general for TARP.

The Obama administration has said TARP has turned a profit on about $205 billion injected into banks, but still projects losses for the entire fund.

The report to Congress said that one recent cost estimate put TARP losses at about $68 billion and noted that banks and other financial institutions still owe $118.5 billion.

Policymakers "should not be focused alone on money in and money out. TARP's costs and legacies involve far more than just dollars and cents," the report said.

"While TARP and other government responses to the financial crisis may have prevented the immediate collapse of our financial and auto manufacturing industries, and improved stability since 2008, the trade-off is not without profound long-term consequences.

"A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed 'too big to fail.'"

Romero and her predecessor in the watchdog position, Neil Barofsky, have been highly critical of the way the Treasury Department has run TARP. They have pushed back strongly against the administration's positive stance on TARP's effect and financial outlook.

Last week, administration officials predicted that the U.S. probably would make a profit of as much as $163 billion over the next decade on all the bailout initiatives that began in 2008 to rescue the financial industry during the Great Recession.

That result would be attributed largely to $179 billion in excess profit from the Federal Reserve over the next 10 years, mainly gains from its extraordinary purchases of mortgage-backed securities and other assets that helped bail out the industry and stimulate the economy.

The Treasury Department has never projected a profit for the entire TARP program. The administration estimated in February that lifetime losses from TARP would be $67.8 billion, largely because of the General Motors Co. and the Chrysler Group bailouts, as well as mortgage assistance programs.

Last month, the Congressional Budget Office estimated that TARP would lose $32 billion.

Treasury officials have said the government has made a small profit on the TARP money invested in banks. Most large banks have repaid their government aid and also have paid cash dividends and bought back stock warrants granted to the government.

Still, 351 of the 707 banks that received bailout money had not repaid it as of March 31, with taxpayers still on the hook for about $15.7 billion, the report said. Of those banks, 330 received less than $100 million each in bailout money.

"They may be virtually unknown outside their immediate communities, but many of these small banks play a critical role in providing loans and cash management services to local employers as well as services, such as checking accounts and auto loans, to local residents," the report said.

Saigon National Bank in Westminster, for instance, caters to Vietnamese immigrants in Orange County and is one of the smallest banks that has yet to repay its TARP money. The bank has $59 million in assets and has missed 13 dividend payments totaling $265,328 on the $1.6-million bailout it received in late 2008.

"Despite the dramatic efforts to expedite the exit of the largest banks from TARP, there appears to be no corresponding plan for community banks," the report said.

Tim Massad, assistant Treasury secretary for financial stability, predicted that more banks would repay their bailout money.

"We've already recovered more than we invested in TARP's bank programs through repayments and other income," he said.

"While there's no one-size-fits-all approach, you'll continue to see us make significant additional progress winding down the program in the year ahead through repayments, sales and other methods."

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