The Return to, and on, TARP

The Treasury Department announced yesterday that it was selling off its last stake in Citigroup and that it would make (note, make , not lose ) about $12.5 billion on the $45 billion investment it made in Citigroup at the height of the financial crisis in 2008. That’s about an 11% annual return on the taxpayers’ money.

I mention this because, among my many faults, I like to say, “I told you so.”

Back on September 26, 2008, when Congress was considering what is now known as the Troubled Asset Relief Program (TARP), I argued in this space that the principled, economically conservative position was to support , not oppose, the plan. I argued, in short, that the conservative position is not that government should never intervene in markets but that it should not intervene when it is economically inefficient to do so. This, of course, is most of the time, but there are exceptions, including when government overcomes a collective action problem to quell a market panic, and since TARP would do just that, government intervention was warranted, even on conservative principles. I stand by that argument. As Warren Buffett recently wrote in an op-ed in The New York Times , “Just as there is a fog of war, there is a fog of panic—and overall, [the government’s] actions were remarkable effective.”

I also argued that TARP would likely make money, not lose money, by buying the various kinds of mortgage-backed securities for which the market had then frozen. Technically, that point is moot, since TARP became a program of equity investments in banks, not an asset-purchase program, but the Federal Reserve, via its MBS Purchase Program has bought about $1.25 trillion worth of mortgage-backed securities, and, so far, it has made money, not lost it, on those transactions. Furthermore, as the government’s return on its Citigroup investment shows, even the converted version of TARP has turned out pretty well. The investments in the large banks that TARP was primarily designed to save have earned money for the taxpayers, and even taking account of investments that the government made in other financial firms (many of which, I admit, were not warranted), the final cost of TARP to the taxpayers will likely be about $25 billion, only a tiny fraction of the $700 billion invested.