While proponents of the $700 billion bank bailout may have celebrated the “end” of TARP this weekend, there are several reasons taxpayers are not off the hook yet for this unprecedented intrusion into the financial industry. The program that was intended to rescue financial entities deemed “too big to fail” has itself become a costly behemoth, the repercussions of which will be felt for years.
- While government capital was injected directly into banks at the caprice of the Treasury Department under TARP, they have no obligation to pay these funds back as long as they make dividends payments on the loans. Currently, about 600 banks have refused to give back their taxpayer-funded handouts.
- Congress keeps resurrecting TARP: Congress recently passed a bill that established the Small Business Lending Fund, a program predicated on the same failures of the first bank bailout. It allows Treasury $30 billion in new capital to inject into small banks, despite the fact that small lenders who received funding under the original bailout have failed to pay dividends on those loans.
- The Financial Regulatory overhaul, though sparse on details, gives broad discretion to bureaucrats to break up banks to avoid their becoming “too big” to fail. This sets the stage for enormous and anonymous government intrusion into the financial arena, and will prompt speculation and uncertainty, both of which the financial markets abhor.
- CBO estimates the initial bank bailout will ultimately cost taxpayers $66 billion, while Treasury projects a $105 billion loss. While Treasury will no longer be able to authorize new disbursements under TARP, the billions in outstanding contracts are unlikely to be repaid in full.
- The permanent bailout ethos: the unstated government guarantee initiated by TARP promotes the idea that taxpayers will back the risk of any institution deemed important by Treasury. Recently, Elizabeth Warren, former chair of the Congressional Oversight Panel tasked with evaluating TARP, warned: “As long as the biggest companies in America believe that you and I will bail them out, the worst effects of the AIG rescue will linger.”
“What TARP did was tell financial institutions—and later, other enterprises, such as the auto industry—that taxpayers will fund risks the private market refused to sustain,” said Americans for Tax Reform President Grover Norquist. “TARP is a state-sponsored vampire: it sucks the life blood from taxpayers to reward bad behavior. This Halloween, Americans have more to fear than goblins and ghosts.”