5 myths about TARP

By Timothy F. Geithner

The Troubled Asset Relief Program expired last month, ending what was perhaps the most maligned yet most effective government program in recent memory. Despite new evidence about the low ultimate cost and positive impact of the TARP, there is still a chasm between the perceptions of the program and its overwhelmingly favorable effect on the U.S. economy.

The TARP was doomed to be unpopular from inception, because Americans were rightfully angry that the same firms that helped create the economic crisis got taxpayer support to keep their doors open. But the program was essential to averting a second Great Depression, stabilizing a collapsing financial system, protecting the savings of Americans and restoring the flow of credit that is the oxygen of the economy. And it helped achieve all that at a lower cost than anyone expected.

Let's put to rest some of the myths about the TARP.

1. The TARP cost taxpayers hundreds of billions of dollars.

The cost of the TARP will be considerably lower than once feared. The direct budget cost of the program and our full investment in the insurer AIG is likely to come in well under $50 billion - $300 billion less than estimated by the Congressional Budget Office last year. And taxpayers are likely to receive an impressive return (totaling tens of billions) on the investments made under the TARP outside the housing market.

2. The TARP was a gift for Wall Street that did nothing for Main Street.

Financial crises matter not because they hurt banks and bankers. They matter because they kill jobs, businesses and the value of retirement savings. To protect Main Street from the damage caused by a financial crisis, you must first put out the financial fire. That is precisely what the government did.

In the fall of 2008, the Bush administration injected nearly $250 billion into our largest financial institutions and provided a guarantee, for a fee, to help them continue to operate. Those emergency actions were absolutely essential. Without them we would have seen a broader collapse.

Those initial investments, which came with limited conditions designed to protect taxpayers, helped stop the free fall of the financial system. But by the time President Obama took office, credit markets were still severely distressed and the economy was contracting at an accelerating rate.

So we shifted strategy to recapitalize the financial system with tough conditions and with private money, not public funds. And we focused resources toward lowering mortgage rates, reducing foreclosures and helping restart the credit markets for consumers and small businesses.

And where we inherited commitments to individual institutions - such as AIG and auto companies - we acted to ensure that those companies were fundamentally restructured so they could survive without government assistance and ultimately repay the taxpayer.

3. The TARP was a quick fix for the market meltdown but left our financial system weak.

The U.S. financial system has been overhauled and is in a much stronger position today than before the crisis. In fact, the weakest parts of the system are gone.

Of the 15 largest financial institutions before the crisis, four are no longer independent entities. Five were forced to restructure. Two have altered their legal form and are subject to much stricter federal oversight. Ten have seen major changes in senior management and boards of directors.

The firms that remain are less leveraged and hold much more capital (or financial reserves) against risk.

4. The TARP worsened the concentration of the banking sector, leaving it more vulnerable to another crisis.

It is true that the financial system is more concentrated today than before the crisis. This was unavoidable, but our banking system is still much less concentrated than systems in other major countries and represents a smaller share of our economy. We have 7,800 banks, not five, and we are less dependent on banks overall for credit, with securities markets and other financial institutions providing roughly half of all credit to businesses and individuals.

More important, the financial reforms enacted by Congress in the Dodd-Frank Act created stronger protections for consumers and against excessive risk-taking than existed before the crisis. They include greater transparency, tight limits on size and further concentration, and a clear prohibition on taxpayer-funded bailouts.

5. The TARP was the centerpiece of a strategy by President Obama to assert more government control over the economy.

The TARP was created by a conservative Republican president, who was also forced by the crisis to take over Fannie Mae and Freddie Mac, lend billions to the automobile industry and guarantee money-market funds. And the TARP was championed by the same Republican congressional leaders who are in office today. They deserve more credit for the courage they showed than they seem willing to accept now.

To date, we have recovered more than $200 billion in TARP funds, as well as made $28 billion in profits. And, in the end, 90 percent of that once-feared $700 billion TARP price tag either will not have been spent or will be returned to the taxpayers.

The TARP is over. The financial security of all Americans is much stronger than it would have been without the rescue strategy that the program made possible. It worked.

Timothy F. Geithner is Secretary of the Treasury. Comments: (202) 622-2000