The final cost of the Treasury’s bailout of American International Group (AIG) is now in. As it turns out, saving the insurance giant did not cost taxpayers anything; instead, the government made a profit of $22.7 billion.
The U.S. government’s run as an AIG shareholder officially ended last Friday, when the Treasury sold its remaining 234 million shares at $32.50 per share. The Treasury’s initial $68 billion investment in AIG was the largest made under the Troubled Asset Relief Program (TARP). At one point, taxpayers owned 90 percent of the company.
Four years after the Treasury cast its TARP over the nation to protect it from financial collapse, that blanket is now being lifted. More than 90 percent of the $418 billion invested through TARP has now been recovered. The bank-related portion of the program has already netted a collective profit of around $23 billion, despite the fact that many smaller banks still owe money. The auto industry rescue has not been as successful as the bank rescues; at current prices, the Treasury would lose billions if it sold its 26.5 percent stake in General Motors.
Overall, TARP is still expected to cost taxpayers money, but far less than many feared. According to current estimates, the final price tag will be about $24 billion. That is less than 6 percent of the initial investment or, seen another way, about a week's worth of the federal government's current flood of red ink.
Some part of TARP’s success is certainly due to the work of dedicated individuals, including AIG Chief Executive Robert H. Benmosche, who took the helm in 2009 and used the capital infusion to put the company back on its feet. The deeper reason for the program’s success, however, is that most of the “troubled” assets it has saved were never that troubled to begin with.
I have previously noted that the crisis was never a financial crisis so much as it was a crisis of confidence. Most financial institutions were solvent all along. The problem was that nobody knew how to distinguish the few that were not solvent from the many that were. TARP stopped borrowers from guessing whether any particular institution might fail by ensuring them that none would. Later, stress tests helped to confirm that most banks were prepared to stand on their own.
There were some real flames behind all of the smoke, notably in the housing and mortgage sector. Fannie Mae and Freddie Mac still owe taxpayers $140 billion, and lawmakers have yet to come up with any long-term plan either for recouping that money or for reducing the government's heavy hand in the mortgage market. Those financial fires, however, were far more contained than they initially seemed. The real danger was in the smoke, which TARP was able to clear. By quickly restoring confidence, the program averted what could have been a major catastrophe and, as we are now seeing, it did so at a minimal cost.
Yet even as the evidence of TARP’s success comes in, the Dodd-Frank law on financial reforms makes it less likely that a similar program could be used in the future. Rather than simply addressing the causes of the panic by implementing more rigorous standards for stress tests, financial transactions and accounting, Dodd-Frank took away the tools the Federal Reserve would need to address another panic if it did occur.
As President Obama promised when the law passed, with Dodd-Frank there will be “no more taxpayer-funded bailouts, period.” If we ever find ourselves in a situation like 2008 again, that won’t be a good thing.
The residual hostility toward TARP is based on the erroneous but popular belief that the rescue was a gift of some sort to that nebulous villain “Wall Street,” taken forcefully from the hardworking middle class, rather than, as it really was, a temporary and successful investment made to restore confidence at a time when confidence was desperately needed. As we start to see returns on that investment, the characterization of TARP as a gift has become harder to sustain, though that does not stop people who are hostile to private capital from taking that view, nor politicians from pandering to financially stressed voters’ conviction that someone, somewhere, must have set out to victimize them.
But as TARP winds down, the financial institutions that were stabilized in the depths of the crisis are getting back on their feet, and taxpayers are getting their money back. As government programs go, that’s a home run.