Inspector General Report Rips Treasury on TARP

Econintersect:  The quarterly report to Congress from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has many critical finding about the performance of the U.S. Treasury in administering the TARP program.  The report, the first issued under the direction of Christy Romero who was sworn in as the new head of SIGTARP, was a book length document of 328 pages, slightly longer than the three quarterly reports preceding.  The report added more fuel to the fire now raging over the large number of smaller banks which received TARP funds, have not repaid and now appear to be in trouble.

First, let’s hit one of the specific points in the report:  the estimate that TARP will end up costing the government $60 billion.  This is significantly larger than the CBO (Congressional Budget Office) estimate of $34 billion last December (GEI News).  Felix Salmon has summarized that story very well:

Two government agencies. Two completely different narratives of the bailouts.

Roughly a week after the Treasury Department extolled the virtues of America’s crisis-era bailout measures, a government watchdog has a very different story to tell. SIGTARP, the office created to oversee the Troubled Asset Relief Program and headed by Christy Romero, has released its latest quarterly report to Congress [PDF].

If you’re struggling to understand the financial crisis and its aftermath, don’t read them back-to-back. One is a story about an against-all-odds victory; the other is about the one that got away.

Last week Treasury estimated that TARP investments, excluding its housing programs, would yield “an overall positive return for taxpayers.” SIGTARP, clearly pushing back against Treasury, says: “It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion.”

Some further details about the trouble brewing for small banks are found in a Reuters article at Yahoo:

In its latest quarterly report to Congress, the Special Inspector General for the Troubled Asset Relief Program, known as SIGTARP, noted that as of March 31 there were still 351 regional and community banks in the bailout program.

Banks had to agree to give the Treasury Department an ownership interest in the form of preferred stock and warrants to buy more stock as a condition of receiving bailout money. They have to buy the stock back to exit the program.

SIGTARP noted that 137 banks were able to refinance out of the bailout program by using money they received through another program, the Small Business Lending Fund, which was set up in 2010 to let Treasury make capital investments in banks and so boost credit availability for small businesses.

The report notes that the hundreds of banks left behind, still owing bailout money, are mostly smaller and they face a new risk because dividend payments that they are required to pay the government nearly double in late 2013 to 9 percent from 5 percent.

The SIGTARP report states that of the 351 banks which still owe some $15 billion TARP funds, there are 163 (46%) that are not even current on the 5% dividend payments. Six or more payments have been missed by 95 of these banks.

A graphic from The Wall Street Journal, shows how the missing payment problem has been growing.

As of 1Q/2012, the graph indicates that $2.84 billion in payments are in arrears.  An example of one small bank given in the WSJ article shows a case where a bank with only $59 million is assets owes repayment of $1.5 million TARP loan and $265,328 in dividend payments that are in arrears.

John Lounsbury

Sources:

• Quarterly Report to Congress (SIGTARP, 25 April 2012)

• Counterparties:  SIGTARP vs. Treasury (Felix Salmon, Reuters, 25 April 2012)

• CBO:  TARP Cost Estimate Increased to $34 Billion (GEI News, 20 December 2011)

• Small banks in bailout pool under pressure (Reuters via Yahoo, 25 April 2012)

• TARP:  Billions in Loans in Doubt (Victoria McGrane, Robin Sidel and Jeffrey Sparshott, The Wall Street Journal, 24 April 2012)