TARP Bank Bailout: Reverse Auctions, Equity Warrants and a $15.3B Surplus

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When the U.S. government closed the books on the Wall Street bank bailouts in December 2014, the Treasury had booked a $15.3 billion surplus on the $426.4 billion it invested directly in financial institutions. This episode explains how the Troubled Asset Relief Program, created by the Emergency Economic Stabilization Act that George W. Bush signed in 2008, was first meant to buy toxic mortgage-backed CDOs through reverse auctions. Analyst Meredith Whitney pointed out the flaw: selling at true market prices would force banks to write down every similar asset and wipe out their capital. After UK Prime Minister Gordon Brown described Britain's direct capital injections, the Treasury announced the $250 billion Capital Purchase Program on October 14, buying preferred stock and taking equity warrants.

The program then expanded to AIG, which received $67.8 billion because it had sold credit default swaps insuring the mortgage market, and to almost $80 billion for General Motors, Chrysler and financing arms such as GMAC. The Congressional Oversight Panel found no demonstrable effect on lending, and PNC used $7.7 billion in TARP funds to buy rival National City Corp for $5.58 billion within hours. Paul Krugman attacked the non-recourse loans in Timothy Geithner's Public-Private Investment Program, and special inspector general Neil Barofsky warned of fraud. The Congressional Budget Office's April 2024 report put total disbursements at $443.5 billion and the net cost near $31.1 billion, driven by mortgage assistance grants that were never repaid.

• Citigroup received $45 billion plus $306 billion in asset guarantees, and Bank of America received $45 billion.
• Participants faced a $500,000 cap on tax deductions for executive pay, a ban on new golden parachutes and a clawback rule.
• The American Bankers Association lobbied to cancel the government's warrants, while Goldman Sachs said taxpayers deserved a decent return.
• By October 2011 SIGTARP had more than 150 investigations, 28 convictions and $151 million recovered, and it stopped $553 million going to Colonial Bank.
• The savings and loan bailout cost about 3.2 percent of GDP, while TARP's cost was estimated at less than 1 percent.