Report on the Troubled Asset Relief Program–April 2023

The Emergency Economic Stabilization Act of 2008 (division A of Public Law 110-343) established the Troubled Asset Relief Program (TARP) to enable the Department of the Treasury to promote stability in financial markets by purchasing and guaranteeing “troubled assets.”1 Section 202 of that legislation, as amended, requires annual reports from the Office of Management and Budget (OMB) on the costs of the program.2 The law also requires the Congressional Budget Office to submit its own report within 45 days of the issuance of OMB’s report each year. CBO’s assessment must discuss three elements:

• The costs of purchases and guarantees of troubled assets,
• Information CBO collects and the valuation methods it uses to calculate those costs, and
• The program’s effects on the federal budget deficit and debt.

To fulfill that requirement, CBO has prepared this report on the TARP’s transactions that were completed, outstanding, or anticipated as of February 28, 2023. By CBO’s estimate, $444 billion of the $700 billion initially authorized will be disbursed through the TARP, including $0.1 billion in projected future disbursements (see Table 1). (About $410 billion of the total amount was disbursed by March 2011.) CBO estimates that the government’s total subsidy costs—including those already realized and those stemming from outstanding and anticipated transactions—will be $31 billion (see Table 2).

The estimated cost of the TARP stems largely from grant programs aimed at preventing foreclosures on home mortgages, assistance that was provided to American International Group (AIG), and aid that was provided to the automotive industry. Taken together, other transactions with financial institutions have yielded a net gain to the federal government from dividends, interest, and capital gains.

CBO’s assessment of the TARP’s costs is about the same as what the agency last reported in May 2022.3 In addition, CBO’s current estimate is similar to OMB’s latest estimate.

The U.S. financial system was in a precarious condition when the TARP was created, and the transactions envisioned and ultimately undertaken entailed substantial financial risk for the federal government. Nevertheless, the TARP’s net realized costs have proved to be near the low end of the range of possible outcomes anticipated at the program’s outset.

Estimating the Costs of the TARP

To estimate the value of the TARP’s asset purchases and guarantees, CBO uses procedures similar to those specified in the Federal Credit Reform Act of 1990 but with an adjustment to account for market risk, as directed by the Emergency Economic Stabilization Act of 2008. Because nearly all transactions undertaken through the TARP are now completed and many programs have no outstanding investments, CBO’s current estimate largely reflects the realized costs or gains as recorded by OMB for past years. CBO converted those costs or gains to a net present value by using as a discount rate the interest rate on the Treasury securities with a maturity that most closely matched the period for which a transaction was outstanding.4 For the few investments that remain, projected cash flows were converted to a present value using a discount rate that included a risk premium—the additional compensation that private investors would require to bear the investment risk.5

All of the TARP’s future disbursements are expected to occur through its mortgage programs in the form of grants to borrowers, servicers, investors, and state housing finance agencies. For those future grant payments, the estimated cost ($0.1 billion) equals the projected amount of the disbursements.

Transactions of the TARP

The TARP’s transactions fall into four broad categories:

• Capital purchases and other support for financial institutions,
• Assistance to the automotive industry,
• Investment partnerships designed to increase liquidity in securitization markets, and
• Mortgage programs.

Most of the support provided by the TARP has been repaid or terminated; currently, only transactions related to mortgage programs are ongoing. Details of those completed transactions—including capital purchases and other support to financial institutions (AIG, Citigroup, and Bank of America, among others) and assistance to the automotive industry—are discussed in previous editions of this report (the most recent of which was published in May 2022). None of the investments the Treasury acquired through the TARP’s Capital Purchase Program remain outstanding.

The ongoing mortgage programs stem from an initial commitment by the Treasury of $50 billion in TARP funds for programs to help homeowners avoid fore­closure. Subsequent legislation reduced that amount, and CBO anticipates that $32 billion will ultimately be disbursed.6

Through February 28, 2023, total disbursements of TARP funds for all mortgage programs were $31.8 billion. Because most of those funds were in the form of direct grants that do not require repayment, the government’s cost is generally equal to the full amount disbursed (which is to say that the program has a 100 percent subsidy rate). CBO’s current estimate of the cost for the mortgage programs is largely unchanged from what the agency reported in May 2022.

Comparison of CBO’s and OMB’s Estimates

CBO has adopted the cost assessments for completed transactions that OMB published in its March 2023 report. CBO and OMB have used similar approaches to evaluate the TARP’s ongoing programs for purchasing assets and making grants. OMB’s most recent estimate of the program’s total cost is $0.3 billion higher than CBO’s current estimate. Specifically, OMB estimates a cost of $31.8 billion for the Treasury’s mortgage programs, whereas CBO anticipates a cost of $31.5 billion.

Changes in CBO’s Estimates Since May 2022

In its Report on the Troubled Asset Relief Program—May 2022, CBO projected that the TARP would cost $31 billion over its lifetime. CBO’s current estimate is about the same.