TARP grows deep roots

The effects of the government’s $700 billion bailout of the financial industry may last for years, even as lawmakers push to end the controversial program before 2010.

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The debate over the programs future comes a year after lawmakers were spurred into action to pass the bailout package, known officially as the Troubled Asset Relief Program (TARP). A year ago Tuesday, the Dow Jones Industrial Average plunged 778 points, the largest one-day drop in points in its history, as investors and government officials warned that America was staring into the abyss of another Great Depression.

Although the sense of crisis is waning and the Obama administration is winding down several rescue programs, hundreds of billions of dollars in existing commitments may remain on the government’s books for years to come. Some may never be repaid in full.

“A lot of this is going to wind down by itself and already has started doing so, and we see that we’ve been repaid substantial amounts of TARP money already as the banks recapitalize,” said Herbert Allison, assistant Treasury secretary, at a hearing last week. “Nonetheless, there are still areas that are troubled.”

Treasury Secretary Timothy Geithner is considering whether to extend the rescue effort before its legal mandate expires on Dec. 31, but the commitments will last even if the Obama administration lets the TARP authority expire.

“Either way, the federal government is going to be running a fairly large portfolio for a while,” said Lou Crandall, chief economist at Wrightson ICAP, a consulting firm. “They are going to need management expertise for a long time.”

The government will continue to employ scores of officials to monitor TARP investments. They will attempt to maximize the amount of money that is repaid to the government and root out fraud and abuse. The Treasury Department’s Office of Financial Stability, set up to manage TARP, will last well into the future. The Special Inspector General over TARP continues to hire auditors and investigators to oversee the program.

Before the end of this year, a special government office will approve or require changes to the pay practices at seven firms that have received “exceptional assistance” from the government, including Citigroup, Bank of America and American International Group (AIG).
Significant portions of the TARP program may continue for years:

• More than 600 banks continue to rely on the capital purchase program that put equity into the firms. TARP provides incentives for banks to repay the money early, but the Obama administration’s latest budget documents predict a $10 billion debt in TARP equity accounts in 2016.

• The Term Asset-Backed Securities Loan Facility (TALF), a program run jointly by the Federal Reserve and Treasury to support credit markets, has already been extended into the first half of 2010. The TALF program relies in part on TARP money.

•  The Treasury Department is just getting under way with a program to draw in private investors to purchase the troubled assets that still dog the banking industry. The contract terms under the program to purchase securities based on those toxic assets last for up to a decade. The Public-Private Investment Partnership (PPIP) is supported with $75 billion in TARP funds.

• The Obama administration’s effort to support the housing market with incentives to firms that modify loans is still getting started. The program relies on $50 billion in money under the TARP program. The administration has set a goal for firms to modify 500,000 loans by Nov. 1, but the terms of the program show that modifications continue for five years.

• The Fed and Treasury committed more than $180 billion to support the crippled insurance firm AIG. The company is attempting to restructure, but it has yet to repay roughly $45 billion of the TARP money. The Government Accountability Office (GAO) said the company’s ability to repay is “unclear at this time.

Those TARP programs will continue as lobbyists and lawmakers ramp up the pressure on the government to pull back from private markets.

“We think it’s important for the government to have some timelines to get out of all of these businesses,” Bruce Josten, head of government affairs at the U.S. Chamber of Commerce, said in a recent interview. The Chamber lobbied strongly for Congress to pass the TARP program last year and believes it was central to stabilizing financial markets.

The Obama administration has touted a “new phase” of recovery and particularly the “stress tests” this spring that boosted confidence in the banking sector. Several of the country’s largest financial firms quickly raised tens of billions of dollars in capital. And more than 40 firms receiving equity from the government have already repaid a combined $70 billion.

Thirty-nine Republican senators and Sen. Mark Begich (D-Alaska) wrote to the Treasury Department to let the TARP program expire this year and use the repaid money to reduce the national debt.

Meanwhile, Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.) have sponsored legislation that would shift the government’s investments in a private company, if they exceed 20 percent of the firm, to an independent trust. The bill would apply to AIG, General Motors and Citigroup.

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