At the height of the program, the federal government (and ultimately U.S. taxpayers) guaranteed or insured $4.5 trillion in face value assets, with the majority of the guarantees backing money market accounts that held high concentrations of government debt in the form of Treasury securities. So the added exposure was not for the full face value, since government debt is already backed by the full faith and credit of the U.S. government.
The primary benefit of these guarantees was to restore faith in the U.S. financial marketplace. Essentially, with these guarantees the global marketplace knew "the American taxpayer would bear any price, absorb any loss, to avert a financial meltdown." Could the U.S. have actually made good on $4.5 trillion in guarantees? Probably not, and they carried great risk for U.S. taxpayers. But the gambit seems to have worked.
The Temporary Guarantee Program for Money Market Funds (TGPMMF), which was the largest of the three programs, ended with no loss. The Debt Guarantee Program (DGP), which currently guarantees a principal amount of $307 billion (plus interest) will diminish as of June 2012 with just $2 million expected in losses to date.
The Asset Guarantee Program (AGP) has only one bank still using its guarantees: Citigroup (C). Actuarial estimates point to a possible loss of $34.6 billion under a moderate stress test scenario and $43.9 billion under a severe stress test scenario. Since there is a $39.5 billion deductible, the highest possible risk for the Treasury is $3.96 billion. The AGP for Bank of America (BAC) has ended.
The panel noted a "trend towards a more aggressive and commercial stance on the part of Treasury staff in safeguarding the taxpayers' money, evidenced, for example, in the apparently robust negotiation of the Bank of America termination fee." The panel recommends that this trend continue, but also wrote: "It should be noted, however, that this newly aggressive stance has a disproportionate effect on banks that remain governed by TARP, meaning that financial institutions that have already exited TARP have been treated more leniently."
Yet the risk noted by the panel is a "significant element of moral hazard," and a very large amount of money remains at risk, especially in the Debt Guarantee Program. "By limiting how much money investors can lose in a deal, a guarantee creates price distortion and can lead lenders to engage in riskier behavior than they otherwise would," the panel added.
The panel also believes greater transparency is needed now that we seem to have passed the worst of the crisis. In conclusion, the panel stated: "While it may be understandable that much of the government's reaction to the financial crisis was based on expediency rather than clear and transparent principles, the result is that government intervention has caused confusion and muddled expectations. Extraordinary transparency is necessary in order to determine the rationale behind the guarantee programs, and whether they have achieved their objectives."
The panel has four key recommendations:
- The Panel recommends that Treasury disclose the rationale behind the creation of guarantee programs, including a discussion of any alternatives, why those were not selected, a cost-benefit analysis of all options, and why Citigroup and Bank of America were the only institutions selected for asset guarantee protection.
- The Panel recommends that Treasury fully and publicly disclose its legal justification for creating the TGPMMF through the use of the Exchange Stabilization Fund. Treasury should also provide reports of the total number of money market funds participating in the program, or the total dollar value guaranteed, for each month that the program was in existence.
- The Panel also recommends that the [memorandums of understanding] MOUs with Citigroup and Bank of America, and the MOU with any other institution relevant to this report on the AGP and other TARP-related guarantees, be provided to the Panel to inform its oversight functions, to be used subject to applicable legal protections.
- The Panel recommends that Treasury provide regular disclosures relating to the guarantee of Citigroup assets under the AGP, including the final composition of the asset pool (as reflected on Schedule A to the Master Agreement) and total asset pool losses to date, as well as projected losses of the pool, and how these estimates have been calculated.
Until there is true transparency about what was done, how it was done and why it was done, no one can truly assess whether TARP was the right answer. If the crisis is truly ending, why do we need these answers? They are critical to assessing the actions taken and determining what worked, what didn't and what should be done in the future if our nation is ever faced with a similar crisis.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and Trading for Dummies.