The shrinking, shirking Tarp | FT Alphaville

The shrinking, shirking Tarp

As if it couldn’t get any rosier: $25bn is the new bargain basement Tarp cost, according to figures out Tuesday from the Congressional Budget Office.

This is an ostensible snip compared to recent, relatively whopping estimates from the White House’s Office of Management and Budget (OMB) at $113bn in October 2010 and the CBO’s previous forecast of $66bn in August 2010.

So, why the continuing reduction? Three main reasons, according to the CBO.

First, there’s increased market prices for government investments:

CBO derived its market-based valuations from information available as of November 18, 2010, whereas OMB used data as of May 31, 2010. Because both agencies estimate subsidy costs using market prices, fluctuations in prices over time lead to different estimates of the program’s costs. Since the date of OMB’s analysis, market prices for shares of financial institutions have generally increased, which has raised the estimated value of the Treasury’s outstanding investments.


FT Alphaville has written previously on the wonkish debate over whether this is the right way to calculate anticipated losses — and, is it kosher to assume that any AIG sale of common stock will go as smoothly as the GM IPO?

Second, there’s also been less spending on mortgage programmes than previously expected:

OMB estimated that $46 billion will be disbursed through the Treasury’s mortgage programs; CBO anticipates that only $12 billion will be spent. The difference between those two estimates stems primarily from disparate outlooks on the number of eligible households and the participation rate among those households.


Then again, this may also reflect Hamp’s difficulties and relatively poor success rates.

But third, there’s also been a more positive view of GM and AIG assistance costs:

CBO’s assessment of the cost of assistance to AIG and GM is significantly lower than that of OMB; however, the two companies’ respective restructuring plans were announced after OMB completed its analysis.

The CBO now assumes automotive assistance will total $19bn, $11bn less than the OMB figure calculated before the November 18 GM share sale. But, as the Treasury readily recognises, GM is still unlikely to turn a profit.

Here’s the summary table anyhow:

Of course, a cheap Tarp doth not automatically make a good Tarp. Nevertheless, the headline cost is certainly impressive considering previous estimates and what else you can get for about $83 per person these days. (A $15bn estimated net gain from the Capital Purchase Program is also not to be sniffed at.)

Sure, the jury is still very much out on AIG (and to a lesser extent, the GM sale), while the protean Hamp programme looks clearly to be underperforming.

But this nitpicking ignores the more important issue, as discussed previously on FT Alphaville – Tarp’s long-term implications.

The $25bn will probably only seem a bargain if it’s not followed by a further, bigger bailout a few years down the line. Both moral hazard and ‘too big to fail’ issues are now worse than before the crisis. And it’s unclear yet whether FinReg was proactively reactive enough to prevent systemic risk from building up in the first place.

In which case  — could $25bn end up being the price of a false dawn?

Related links:
Thanks for what, Warren? – FT Alphaville
Why does everyone hate Tarp? – FT Alphaville
The AIG wars – FT Alphaville