March 28, 2012
Report on the Troubled Asset Relief Program—March 2012
March 28, 2012
In October 2008, 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 through the purchase and guarantee of "troubled assets." Section 202 of that legislation requires the Office of Management and Budget (OMB) to submit semiannual reports on the costs of the Treasury’s purchases and guarantees of troubled assets. The law also requires the Congressional Budget Office (CBO) to prepare an assessment of each OMB report within 45 days of its issuance. That assessment must discuss three elements:
- The costs of purchases and guarantees of troubled assets,
- The information and valuation methods used to calculate those costs, and
- The impact on the federal budget deficit and debt.
To fulfill its statutory requirement, CBO has prepared this report on transactions completed, outstanding, and anticipated under the TARP as of February 22, 2012. By CBO’s estimate, $431 billion of the initially authorized $700 billion will be disbursed through the TARP, and the cost to the federal government of the TARP’s transactions (also referred to as the subsidy cost), including grants for mortgage programs that have not yet been made, will amount to $32 billion.
The estimated cost of the TARP stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding foreclosures. Other transactions with financial institutions will, taken together, yield a net gain to the federal government, in CBO’s estimation.
CBO’s current assessment of the cost of the TARP’s transactions is $2 billion lower than the $34 billion estimate shown in the agency’s previous report on the TARP (issued in December 2011). That decrease in the estimated cost stems primarily from an increase in the market value of the government’s investments in AIG and General Motors (GM), partially offset by added costs resulting from new initiatives in the Treasury’s mortgage programs. CBO’s current estimate for all TARP transactions is less than OMB’s latest estimate of $68 billion, largely because CBO projects a lower cost for the mortgage programs.
When the TARP was created, the U.S. financial system was in a precarious condition, and the transactions envisioned and ultimately undertaken engendered substantial financial risk for the federal government. Nevertheless, the net costs directly associated with the TARP, when taken in isolation, have been toward the low end of the range of possible outcomes anticipated when the program was launched—in part because funds invested, loaned, or granted to participating institutions through the Federal Reserve and government programs other than the TARP helped limit those costs.
Fair-Value Accounting for Federal Credit Programs
March 5, 2012
Federal credit assistance supports such private activities as home ownership, postsecondary education, and certain commercial ventures. Excluding the activities of Fannie Mae and Freddie Mac, at the end of fiscal year 2011, about $2.7 trillion was outstanding in federal direct loans and loan guarantees.
CBO examines fair-value accounting as an alternative to the current approach for measuring the costs to the government of federal credit programs.
FCRA Treatment Does Not Give a Comprehensive Accounting of Federal Costs
The Federal Credit Reform Act of 1990 (FCRA) requires the costs of credit assistance to be measured by discounting—using rates on U.S. Treasury securities—expected future cash flows associated with a loan or loan guarantee to a present value at the time of disbursement.
In CBO’s view, FCRA-based cost estimates do not provide a full accounting of what federal credit programs actually cost the government because they do not incorporate the full cost of the risk associated with the loans.
Fair-Value Accounting Provides a More Comprehensive Measure of Federal Costs
Fair-value accounting recognizes market risk—the component of financial risk that remains even after investors have diversified their portfolios as much as possible, and that arises from shifts in current and expected macroeconomic conditions—as a cost to the government. To incorporate the cost of such risk, fair-value accounting calculates present values using market-based discount rates. Thus, fair-value estimates often imply larger costs to the government for issuing or guaranteeing a loan than do FCRA-based estimates.
Using FCRA-based estimates instead of fair-value estimates has important consequences for the way policymakers might perceive the cost of credit assistance:
- The costs reported in the budget are generally lower than the costs to even the most efficient private financial institutions for providing credit on the same terms;
- The budgetary costs are almost always lower than those of other federal spending that imposes equivalent true costs on taxpayers; and
- Purchases of loans at market prices appear to make money for the government and, conversely, sales of loans at market prices appear to result in losses.
Fair-Value Accounting Has Challenges
- Government agencies would incur training expenses and the cost of developing new valuation models.
- Fair-value cost estimates would be somewhat more volatile, although factors that also affect FCRA estimates would continue to be the main cause of volatility.
- Fair-value estimating would require analysts to make additional judgments that could introduce inconsistencies in how costs of different programs are evaluated.