Wednesday, October 6, 2010

Treasury Estimates Tarp To Cost $50 Billion

From the executive summary to "The Troubled Asset Relief Program: Two Year Retrospective" report by the Treasury's Office of Financial Stability:
2. Executive  Summary  

October 3, 2010 marked the second anniversary of the Emergency Economic Stabilization Act (EESA) that created the Troubled Asset Relief Program (TARP) and the end of the authority to make new financial commitments.

EESA was an integral part of the government’s program to resolve the financial crisis of 2008 and early 2009. Alongside the actions of the Federal Reserve and the FDIC, and the tax cuts and investments set forth in the American Recovery and Reinvestment Act, the financial actions authorized under EESA were critical in preventing a devastating collapse of our financial system and restarting economic growth.

We now have recovered most of the investments we made in the banks. Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to investments in the automobile industry and housing programs. And we have already returned hundreds of billions of unused authority to the taxpayer to help reduce our debt and future budget deficits.
The ultimate cost of TARP and our other financial policies will depend on how financial markets and the economy perform in the future. If financial and economic conditions deteriorate, prospects for TARP investments will also deteriorate. But in light of the recently‐announced AIG restructuring and when valued at current market prices, Treasury now estimates that the total cost of TARP will be about $50 billion. In addition, using the same assumptions, we estimate that the combined cost of TARP programs and other Treasury interests in AIG will be about $30 billion.
Outside of TARP, we expect to incur substantial losses from Fannie Mae and Freddie Mac (Government Sponsored Enterprises, or GSEs), through capital injections from Treasury to the GSEs through the Preferred Stock Purchase Agreements (PSPAs). These losses stem from poor credit choices and bad risk management decisions before the Federal Housing Finance Agency (FHFA) placed the GSEs in conservatorship in late 2008‐‐not actions taken in 2009 or 2010.

However, a substantial part of the government’s projected losses on its support for the GSEs will be offset by revenue from two sources. Under authority provided by the Housing and Economic Recovery Act (HERA), Treasury purchased more than $200 billion in mortgage‐backed securities guaranteed by the GSEs. Those investments are generating notable returns. In addition, as a result of its emergency financial programs, remittances from Federal Reserve operations to the Federal Budget have increased sharply in 2009 and 2010, and they are projected to remain elevated for some time. While considerable uncertainty remains, revenues from these two sources will significantly offset to likely losses elsewhere.
Read the full report here or on Scribd here.

The complete 98 page report is embedded below:
Troubled Asset Relief Program Two Year Retrospective

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