CBO: TARP Bank Bailout to Cost Government $19 Billion

April 6, 2011 - 4:01 AM

Doug Elmendorf, CBO, COngressional Budget Office

Congressional Budget Office Director Douglas Elmendorf testifies before the Senate Budget Committee on Jan. 28, 2009. (AP File Photo/Pablo Martinez Monsivais)

(CNSNews.com) – The Congressional Budget Office estimates that the Troubled Asset Relief Program (TARP) – the bank bailout package passed in October 2008 – will cost taxpayers approximately $19 billion.

That estimate is down from the $25 billion CBO estimated in November 2010, due to CBO’s new estimates of the ultimate cost of the bailouts to General Motors and Chrylser.

“CBO estimates that the cost to the federal government of the TARP’s transactions (also referred to as the subsidy cost), including grants for mortgage programs that have not been made yet, will amount to $19 billion,” CBO said in its March 30 report.

The cost to government, CBO said, stemmed from the additional bailouts given to insurance giant AIG and the Obama administration’s mortgage modification program HAMP (Home Affordable Modification Program).

“That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding foreclosures.”

The major bank bailout programs that were the original purpose of TARP will, in fact, result in a net profit for the government as banks pay back the money with interest. Most of the original government bailouts have already been paid back, with bailouts for some smaller banks still awaiting repayment.

“Other transactions with financial institutions will, taken together, yield a net gain to the federal government, in CBO’s estimation.”

In fact, CBO notes that of the $700 billion Congress originally granted to the Treasury Department to support the financial system, only $432 billion is expected to actually be spent. This means that the remaining $268 billion will not need to be added to the national debt.

“As a result, only $432 billion will be disbursed through the TARP, CBO estimates, well below the $700 billion initially authorized. Overall, the outcomes of most transactions made through the TARP were favorable for the federal government.”

In fact, were it not for the profitability of the bank bailout portions of TARP – approximately $9 billion – the program would be significantly more costly.

According to CBO, the bailouts for AIG, the auto industry, and HAMP will actually cost the government a total of $41 billion – $14 billion for GM and Chrysler, $14 billion for AIG, and $13 billion for HAMP.

However, the $23 billion in profit the government is expected to make from the core bank bailout programs completely erases the $14 billion loss from bailing out AIG, resulting in the $9 billion profit. That $9 billion in profit brings what would have been a $28 billion loss from the auto bailout, HAMP, and Treasury’s lending facilities to only a $19 billion loss.

The loss from AIG will come from the difference in the price of the stock the government purchased at the time of the original bailouts and the price of that stock today. Essentially CBO estimates that AIG’s stock will not return to the price the government paid for it, resulting in a loss.

The loss from the HAMP program is different from that projected for the AIG bailout. Under this program, the government gave grants to state housing finance agencies and individual mortgage lenders to entice them to help customers renegotiate the terms of their mortgages.

Because these programs were subsidies instead of stock purchases – and were funded with TARP money – the loss to the TARP program is essentially equal to the cost of the subsidies.