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A look back at TARP

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Kai Ryssdal: Of all the gut-wrenching days that the stock markets gave us as the financial crisis was unfolding two years ago, the gut-wrenchingest of all wasn't the day Lehman Brothers went under. It wasn't the day the government took over Fannie Mae and Freddie Mac, or the day AIG got bailed out. It was the day that the House voted down the TARP. That was the day the Dow crashed 777 points.

As we all know, Congress reconsidered a couple of days later and approved the $700 billion bank bailout. It expires on Sunday. But in a lot of ways the TARP lives on. Economically, of course. Politically, too.

Marketplace's Jeremy Hobson has the story.


Jeremy Hobson: Let's go back to Sept. 24, 2008.

Then-President George W. Bush: Good evening. This is an extraordinary period for America's economy.

The nation's largest banks were failing. AIG, Fannie Mae and Freddie Mac had been seized by the federal government. The stock market was on the fritz and credit was drying up. All because the mortgages, or troubled assets, being held by banks were losing value fast.

President George W. Bush addressed the nation from the White House.

Bush: Our entire economy is in danger. So I propose that the federal government reduce the risk posed by these troubled assets and supply urgently needed money, so banks and other financial institutions can avoid collapse and resume lending.

The original plan for TARP was to buy those toxic mortgages from the banks so they'd have nice clean balance sheets and could operate normally. In the midst of a presidential election, though, members of both parties were uneasy about the plan.

Jonathan Alter is the author of the new political book "The Promise."

Jonathan Alter: Barack Obama told me in an interview that he knew that it would be toxic politically for him to back the TARP bailouts, but he also knew that it was necessary to prevent a depression.

Even the House Republican Leader John Boehner, who now decries TARP, pleaded with his members to vote for it.

John Boehner: If I didn't think we were on the brink of an economic disaster, it would be the easiest thing in the world to me to say no to this. But I believe the risk in not acting is much higher than the risk in acting.

But Congress wasn't swayed, and voted TARP down at first. By the time a package was passed, buying up mortgages would have been too time-consuming. So the government decided to temporarily pump money directly into the banks.

And Mark Zandi of Moody's Analytics says that turned out to be a slam-dunk success.

Mark Zandi: The banking system stabilized. If it had not gotten that equity, it would have collapsed and taken the economy with it. We'd be in a measurably worse place.

Zandi, who advised John McCain in 2008, has actually done the measurements. He did a study with a former Clinton Administration economist on where we'd be without TARP. It found there would be 8.5 million fewer jobs than there are now and the unemployment rate would exceed 15 percent.

Zandi: By bailing them out, we bailed ourselves out.

And Zandi says we're likely to make money on the bank bailout part of TARP. As for the parts of TARP that have nothing to do with Wall Street? Well, there were about $80 billion in loans to the auto industry. It's not clear if that will be repaid in full. And about $45 billion is slated for assistance to home owners to modify loans and prevent foreclosures.

As Mark Zandi says:

Zandi: That money is gone. We won't get that money back and we'll lose money on that.

Bottom line, out of the all the money initially made available for TARP, only about $475 billion were used. And the Congressional Budget Office expects we'll get all but $66 billion back. But maybe that's not the whole story.

Kenneth Troske is a University of Kentucky economist who sits on the congressional panel that oversees TARP. He says looking at the TARP in isolation ignores other emergency actions by the Treasury and by the Fed that made it easier for banks to repay their loans.

Kenneth Troske: If you take a very narrow view of TARP, and say "Hey, we made our money back," well a lot of the cost of tarp were shifted to other programs that have received much less attention and much less government oversight.

Still, Troske says that TARP did save our banking system. And that's why he worries for the future. Since TARP has become so unpopular, he says:

Troske: In the next financial crisis, and I do believe that there will be a next financial crisis, we will not see another TARP. And if you felt that that was a valuable way to stem a financial crisis, we've lost that policy instrument.

Though it looks like it will be front and center for the next month, since government bailouts are about the most popular thing to run against.

In New York, I'm Jeremy Hobson for Marketplace.

Kai Ryssdal: As a parting note, 80 banks have repaid their TARP funds in full. That still leaves the Treasury to ride herd on some 600 banks, which together owe the government $55 billion.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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