At the end of March the U.S. Government announced with some degree of fanfare that the Troubled Asset Relief Program (“TARP”) was positioned to earn the U.S. Treasury, and hence U.S. Taxpayers, a profit of $24 Billion. The TARP program was much politicized, frequently criticized and very much misunderstood by most people – in large part because it was a complicated program perceived by most as a bailout for fat cat bankers (thanks, President Obama).
At its core, TARP amounted to an emergency loan for those banks that participated in the program. Being in the business of making and collecting loans, most banks diligently honor their commitments and repay their obligations – just like most individual and business borrowers do – so it is no surprise that the banking industry has repaid their TARP funds ahead of the required payment schedule. All in all, TARP kept the dominoes from falling off the table and helped restore some stability when it was most needed. An investment in the banking system was a sound investment for the government in the crisis of 2008 and is a solid investment for private investors in normal times. But I fear the definition of “normal” may take longer to define.
While the government recovered a profit on TARP, its political reaction to the banking crisis, a.k.a. the Dodd-Frank legislation, is where the lasting costs of the crisis will surface. Dodd-Frank is a massive, comprehensive reform bill that aspires to cure all the perceived troubles of the financial services industry. Some of the more obvious consequences of the bill already evident in the market include (more…)