Wednesday, March 16, 2011

Report: TARP Distorted Markets and Created Public Stigma

The Congressional Oversight Panel's final report on Troubled Asset Relief Program (TARP) found that TARP provided critical support to markets at a moment of profound uncertainty; but also leaves behind a troublesome legacy of continuing distortions in the market, public anger toward policymakers, and a lack of full transparency and accountability.

While the Congressional Budget Office (CBO) initially estimated that TARP would cost taxpayers $356 billion, CBO now estimates the loss at $25 billion. But the report states that part of the reason for the lower cost was not due to the success of the program, but rather due to the failure of the foreclosure prevention program, which had a price tag of $50 billion.

The report also states that TARP exacerbated "too big to fail." The report concluded that TARP caused "small banks continue to pay more to borrow than very large banks - an ongoing distortion in the marketplace. By protecting very large banks from insolvency and collapse, the TARP also created moral hazard." Moreover, Treasury‘s intervention in the automotive industry extended the too big to fail guarantee and its associated moral hazard to non-financial firms.

Moreover, TARP was unpopular from its inception; but Treasury's implementation of TARP just increased its stigma. For example, the report notes that only healthy banks were suppose to be recipients of TARP funds. It was later disclosed that several banks that were near the brink of failure received funds, thus tainting all recipients. Another factor contributing to stigmatization was the haphazard, constantly shifting, and in some ways misleading manner in which the TARP was sold to the public.

As a result of the increased stigma, the program became detested with some smaller banks refusing to participate.

Read the press release.

Read the report.

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