Report on the Troubled Asset Relief Program—July 2021 (2024)

In October2008, the Emergency Economic Stabilization Act of 2008(division A of Public Law110-343) established the Troubled Asset Relief Program (TARP) to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of “troubled assets.”1 Section 202 of that legislation, as amended, requires annual reports from the Office of Management and Budget (OMB) on the costs of the program.2 The law also requires the Congressional Budget Office to submit its own report within 45days of the issuance of OMB’s report each year. CBO’s assessment must discuss three elements:

• The costs of purchases and guarantees of troubled assets,
• Information CBO collects and the valuation methods it uses to calculate those costs, and
• The program’s effects on the federal budget deficit and debt.

To fulfill that requirement, CBO has prepared this report on TARP transactions completed, outstanding, or anticipated as ofApril30, 2021. By CBO’s estimate, $444billion of the$700billion initially authorized will be disbursed through the TARP, including $0.4billion in projected future disbursem*nts. (About $410billion of the total amount was disbursed by March2011.) CBO estimates that the government’s total subsidy costs—including those already realized and those stemming from outstanding and anticipated transactions—will be $31billion (seeTable 1).

The estimated cost of the TARP stems largely from ongoing grant programs aimed at preventing foreclosures on home mortgages, assistance to American International Group (AIG), and aid to the automotive industry. Taken together, other transactions with financial institutions have yielded a net gain to the federal government from dividends, interest, and capital gains.

CBO’s assessment of the TARP’s costs is about the same as what the agency last reported in March2020.3 CBO’s current estimate is $1billion lower than OMB’s latest estimate of $32billion because CBO projects a slightly lower cost for mortgage programs.

The U.S. financial system was in a precarious condition when the TARP was created, and the transactions envisioned and ultimately undertaken entailed substantial financial risk for the federal government. Nevertheless, the TARP’s net realized costs have proven to be near the low end of the range of possible outcomes anticipated at the program’s outset.

Estimating the Costs of the TARP

To estimate the value of the TARP’s asset purchases and guarantees, CBO uses procedures similar to those specified in the Federal Credit Reform Act of 1990, but with an adjustment to account for market risk, as directed by the Emergency Economic Stabilization Act of 2008. Because nearly all transactions undertaken through the TARP are now completed and many programs have no outstanding investments, CBO’s current estimate largely reflects the realized costs or gains as recorded by OMB for past years. CBO converted those costs or gains to a net present value by using as a discount rate the interest rate on the Treasury securities with a maturity that most closely matched the period for which a transaction was outstanding.4 For the few investments that remain, projected cash flows were converted to a present value by means of a discount rate that included a risk premium—the additional compensation that private investors would require to bear the investment risk.5

All of the TARP’s future disbursem*nts are expected to occur through its mortgage programs in the form of grants to borrowers, servicers, investors, and state housing finance agencies. For those future payments, the estimated cost ($0.4billion) equals the projected amount of the disbursem*nts. (Through April30, 2021, the TARP disbursed $31billion in grants for mortgage assistance.)

Transactions of the TARP

The TARP’s transactions fall into four broad categories:

• Capital purchases and other support for financial institutions,
• Assistance to the automotive industry,
• Investment partnerships designed to increase liquidity in securitization markets, and
• Mortgage programs.

Capital Purchases and Other Support for FinancialInstitutions

To support financial institutions, the federal government disbursed $313billion, most of which has been repaid (see Table 2). CBO estimates a net gain to the government of $9billion from those transactions—a net gain of about $24billion from assistance to banks and other lending institutions, partially offset by a cost of $15billion for assistance to AIG (see Table 3).

Capital Purchase Program. Through the TARP’s CapitalPurchase Program (CPP), the Treasury acquired $205billion in shares of preferred stock from 707financial institutions.6 As of April30, 2021, about $12million of that stock remained outstanding.7 CBO estimates a net gain to the government of $16billion from the CPP in the form of dividends, interest, and capital gains.

The preferred stock purchased through the CPP carried a promised dividend equal to 5percent of the government’s investment for the first five years and 9percent thereafter. The shares of preferred stock were accompanied by warrants that allowed the government to purchase common stock equal in cost to 15percent of the amount invested in preferred stock.8 Financial institutions that were not publicly owned provided the government with additional shares of preferred stock instead of warrants. Under the terms of the CPP, the financial institutions that remain in the program continue to be subject to restrictions on the compensation they provide to executives, the dividends they pay to shareholders, and the amount of common stock they can repurchase.

Additional Assistance to Citigroup and Bank of America. In addition to funds from the CPP, Citigroup and Bank of America received supplementary support through the Treasury’s Targeted Investment Program (TIP) and Asset Guarantee Program. All of that support has since been repaid or terminated, resulting in a net gain to the federal government of $8billion.

The two institutions each received $20billion in capital through the TIP. The Treasury also agreed to absorb up to $5billion in potential losses on a $301billion pool of Citigroup’s assets, and it announced plans to guarantee a pool of Bank of America’s assets.

In December2009, Citigroup repaid the $20billion it had received through the TIP and canceled its loss-sharing agreement. In exchange for accepting that early termination, the Treasury retained more than $2billion of Citigroup’s preferred stock, which it sold in September2010. Bank of America also repaid the $20billion it had received; the Treasury never implemented the guarantee plan for Bank of America’s assets.9

Community Development Capital Initiative. Through the Community Development Capital Initiative (CDCI), which has a structure similar to the CPP’s, the Treasury invested $570million in community development financial institutions; $1million of that investment remains outstanding.10 Whereas the preferred stock purchased by the Treasury under the CPP paid a dividend of 5percent for the first five years, the stock purchased under the CDCI paid a dividend of 2percent for the first eight years. After that initial period, the CDCI requires that dividends be paid at a rate of 9percent, as does the CPP. Including realized losses to date, the CDCI is projected to have a net cost to the government of about $70million.

Assistance to American International Group. The Treasury initially provided AIG with two types of financial assistance through the TARP: It purchased $40billion in preferred stock, and it established a $30billion line of credit for the company.11 The Treasury subsequently received another $8billion in preferred stock in exchange for providing $8billion to AIG under that line of credit.

In January2011, as part of a restructuring of AIG’s obligations, the Treasury agreed to exchange its existing preferred stock—with a total value of $48billion—for approximately 1.1billion shares of AIG’s common stock. AIG also drew down more than $20billion from the balance on its line of credit to purchase preferred shares in former AIG subsidiaries from the Federal Reserve Bank of New York; the remainder of the line of credit was canceled with $2billion remaining undrawn.

Since 2011, AIG has fully exited the TARP. The company repaid its line of credit, and the Treasury recouped an additional $34billion from the sale ofits shares of AIG’s common stock—bringing the total amount repaid or recovered to $54billion out of the $68billion originally disbursed. The final net subsidy cost of TARP assistance to AIG was $15billion. (Also, in support of AIG outside the TARP, the Federal Reserve initiated credit facilities that were ultimately closed; the result was that the Federal Reserve remitted to the Treasury additional shares of AIG’s stock.)

Assistance to the Automotive Industry

General Motors (GM) and Chrysler, along with their associated financing intermediaries and suppliers, received about $80billion in TARP funds, all of which has been repaid by the companies or written off by the Treasury.12 The total subsidy cost recorded was $12billion.

GM and Chrysler. Following the bankruptcy proceedings of GM and Chrysler, the Treasury agreed to exchange thedebt positions it held in the original companies for a blend of debt, equity, and preferred shares in the newly configured companies. Since then, the Treasury has sold all of its securities in the two companies, recovering about $47billion of the $61billion it had invested. All told, the Treasury has written off or realized $14billion in losses on its investments in GM and Chrysler.

Financing Intermediaries. The Treasury provided $19billion in financial assistance to GMAC (General Motors Acceptance Corporation) and Chrysler Financial. About $17billion of that amount was invested in GMAC (now Ally Financial). In July2009, Chrysler Financial repaid the $1.5billion it had received from the program. In December2014, the Treasury liquidated its remaining investment in the automobile companies and their financing intermediaries through the TARP. In total, assistance to the two financing intermediaries resulted in a gain to the government of about $1billion.

Investment Partnerships

To encourage private investment in certain financial assets, the Treasury created public-private partnerships for investment in specific sectors. Those initiatives have no outstanding investments, and they resulted in a gain to the federal government of about $3billion.

Term Asset-Backed Securities Loan Facility. The Treasury disbursed $100million to cover potential losses of the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), which provided financing to investors who bought highly rated securities backed by automobile loans, credit card loans, student loans, and business loans guaranteed by the Small Business Administration (SBA). The TALF was closed to new loans in 2010, and the final balance was repaid in 2014, yielding the Treasury a gain of roughly $1billion.

Public-Private Investment Program. Through the Public-Private Investment Program, the Treasury agreed to provide nonrecourse debt and to match private-sector equity in the Public-Private Investment Funds (PPIFs) that purchased illiquid assets from financial institutions.13 In December2012, after they had received a total of $19billion from the Treasury, the PPIFs’ ability to draw on TARP funds expired. The entire amount has been repaid, and the activities of the program, including dividends, interest, and capital gains received, resulted in a net gain to the government of about $3billion.

SBA 7(a) Purchase Program. The Treasury also developed a program to purchase up to $1billion of securities guaranteed by the Small Business Administration. As of October3, 2010, when the TARP’s authority to make new purchases in existing programs expired, the Treasury had purchased about $400million of those securities. All of those securities have been sold, resulting in a small gain to the government.

Mortgage Programs

The Treasury initially committed a total of $50billion in TARP funds for programs to help homeowners avoid foreclosure. Subsequent legislation reduced that amount, and CBO anticipates that $32billion will ultimately be disbursed.14 About $10billion of that total was designated for grants to certain state housing finance agencies and for programs of the Federal Housing Administration.15

Through April30, 2021, total disbursem*nts of TARP funds for all mortgage programs were roughly $31billion. Because most of those funds were in the form of direct grants that do not require repayment, the government’s cost is generally equal to the full amount disbursed (that is, the program has a 100percent subsidy rate). CBO’s current estimate of the cost for the mortgage programs is $0.3billion lower than it reported previously, primarily because it decreased its estimate of the average cost of the mortgage modifications that will occur in the program.

Comparison of CBO’s and OMB’sEstimates

CBO has adopted the cost assessments for completed transactions that OMB published in its May2021report. CBO and OMB have used similar approaches to evaluate the TARP’s ongoing programs for purchasing assets and making grants. However, OMB’s most recent estimate of the program’s total cost is $0.7billion higher than CBO’s current estimate. Specifically, OMB estimates that $32.2billion will be disbursed through the Treasury’s mortgage programs, whereas CBO anticipates that $31.5billion will be spent.

Changes in CBO’s Estimates Since March2020

In its Report on the Troubled Asset Relief Program—March2020, CBO projected that the TARP would cost $31billion over its lifetime. Since then, CBO’s estimate has decreased by $0.3billion, primarily because the agency now projects lower outlays for the mortgage programs.