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The Net Cost of TARP: Addressing the Losses


Somehow, they need to be paid for.


Editor's Note: This article was written by Mike O'Rourke, chief market strategist for BTIG.


The subtitle of the Wall Street Journal's bank fee story explains the Administration's rationale, "White House Seeks to Recoup Cost of TARP; Big Bonuses Put Lenders on Defensive." The real story appears in the middle of the article:

It's unclear precisely who would be subject to the fee. A person familiar with the matter said it's unlikely for now to target auto companies or American International Group Inc. (AIG), all of which are still struggling. Homeowners who benefitted from government-funded housing help also wouldn't pay the fee. A person familiar with the matter said it would make little sense to impose a fee on auto makers or AIG right now. The government owns such a large chunk of them, it would essentially result in the government paying itself.

In short, the government wants to charge the TARP participants, from whom it already made profits, fees to recoup TARP losses. We're familiar with the concept of financing your losers with your winners in this business, but this is off the charts.

Quick TARP Update

TARP -- the $700 billion bailout program Congress passed in order to save Wall Street from itself, bailing out the financial industry, right? Wrong. TARP is a $545 billion (probably even less than that) program implemented to backstop Wall Street, the auto industry, consumers, small businesses, homeowners, and AIG.

While the program was approved and extended for $700 billion, Secretary Geithner has told Congress that Treasury doesn't plan to go above the $545 billion in prior commitments. As a matter of fact, as of Treasury's a)_final_1-11-10.pdf" target="_blank">Monthly 105(a) TARP Report published yesterday, only $213 billion of the $375 billion of disbursements are currently outstanding. Only $83 billion of the CPP and TIP funds disbursed to banks remain outstanding. The banks have repaid $161.89 billion of the $244.89 billion disbursed under those programs. The $213 billion currently outstanding consists of: $83 billion: banks $79.7 billion, automotive industry $45.4 billion, and AIG, $4.7 billion a combination of CBLI (TALF), PPIP, HAMP (Homeowner Modifications). That last group has the potential for up to $140 billion of total disbursements as follows, CBLI ($60 bil), PPIP ($30 bil) and HAMP ($50 bil) if needed, and AIG also has room for another $25 billion, which is how the program gets to $545 billion.

TALF and PPIP disbursements have been small because of the healing that's commenced in the credit markets. The only big outlay currently planned is HAMP, to help homeowners. No doubt, TARP was created to help the banks, but the government changed the direction of the programs. Less than 40% of the funds currently disbursed are in the hands of banks, and when you count what's likely to be disbursed, it drops to 30%. The relative small size of the funds still outstanding doesn't seem to make headlines, though.

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