TARP Might Make Money

The Treasury Department website is dominated by a headline that reads “Tarp Bank Programs Make Money.” The assertion has been challenged by the Congressional Budget Office. The fact that the statement might be even close to true is extraordinary.

“The U.S. Department of the Treasury announced that the Troubled Asset Relief Program’s (TARP) investment in banks has now turned a profit after three financial institutions repaid a total of $7.4 billion in TARP funds today to taxpayers,” the new analysis says. The profit so far is $23.8 billion.

When the TARP was formed during the worst period of the credit crisis, Treasury chief Henry Paulson and Fed head Ben Bernanke probably did not expect the government to make money on the investment. The crisis was so severe that an eventual profit almost certainly did not come to mind. The two men and members of Congress who approved the fund only knew that the US financial system might be weeks from collapse and that the results were too horrible to imagine.

The profit is a testament as much to luck as good judgment. The banking system recovered more quickly than most experts could have expected. This was in part due to bank profits driven by institutional operations that funded and underwrote corporate financial activity. The trading desks at many of the largest financial firms were also spectacularly successful. Part of the toxic paper on bank balance sheets have improved in value and clever accounting has probably helped shore up the value of those assets as well.

Luck played another and more critical role. It would only have taken the failure of one large bank like Citigroup (NYSE: C) to wipe out much of the TARP fund. Citi may have been closer to a collapse than most people knew. It not only recovered but paid back the money it owed the government and Uncle Sam actually made a profit.

The TARP was meant to save the financial system, and it may have done its job almost too well. Its risky investments may be among the best the federal government has made recently.

Douglas A. McIntyre