CBO Reduces Projected Cost of TARP

Back in December, we had surmised that due to recent developments with Citigroup, GM, and AIG, CBO's cost estimate of TARP would come down further from the $25 billion it estimated in November. Well, that turned out to be correct yesterday when CBO released an updated cost estimate of TARP, putting the total cost of the program at $19 billion over ten years.

This report follows a trend over the past two years of declining deficit impact projections for TARP. The highest CBO cost estimate, in April 2009, came after the Obama Administration added foreclosure prevention programs, more auto assistance, investment partnerships, and more AIG assistance to the bank and auto assistance programs that had been in place previously. CBO put the price tag at $356 billion. Then, the next three reports, in June 2009, March 2010, and November 2010 put the deficit impact at $158 billion, $109 billion, and $25 billion respectively, a sharp decline over that year and a half period.

Most of the reduction in the cost estimate from November comes from lower than anticipated subsidy costs for auto industry assistance. A comparison of the past three cost estimates, broken down by category, is presented below.

CBO's Cost Estimates of TARP (billions)
  March 2010 November 2010 March 2011
Capital Purchase Program -$2 -$15 -$16
Citi and Bank of America Assistance -$5 -$7 -$7
Community Development Capital Initiative $0 $0 $0
AIG Assistance $36 $14 $14
Auto Industry Assistance $34 $19 $14
Investment Partnerships (TALF, PPIP) $2 $2 $1
Mortgage Programs (HAMP, HHF) $22 $12 $13
Total $109* $25 $19

*This total includes a 50 percent subsidy rate for $45 billion in remaining TARP authority that hadn't been spent yet. Excluding these funds would leave a cost estimate of $86 billion. 

Here are some of the developments that have occurred since November's cost estimate that may have played a part in the change of the cost estimate:

  • Auto industry assistance: Treasury sold a lot of GM common stock, reducing its ownership stake in the company from 60 percent in November to 33 percent now. In addition, they have received a $2.1 billion repayment of preferred stock from GM and a $2.7 billion disposition from Ally Financial (formerly GMAC). Apparently, some of these moves were unanticipated by CBO, since--as we showed above--this is the largest area of change in the cost estimate.
  • Bank programs: Citigroup finished repaying Treasury's equity stake in the company under the CPP. In addition, many more CPP repayments have been received, the largest being Fifth Third's $3.4 billion repayment in February. All of these developments have reduced the amount outstanding in CPP by $20 billion since November and have reduced CBO's cost estimate of CPP by $1 billion. It is still projected to be the most profitable part of TARP by far.
  • AIG assistance: Treasury has put into action the AIG "exit plan" established in September, which has led to a repayment of the Federal Reserve's line of credit, the Treasury receiving two AIG subsidiaries, and the Treasury holding 92 percent of AIG's common stock. So far, Treasury has received $9 billion back from AIG, all from payments from the subsidiaries. Although CBO didn't change their cost estimate for AIG this time, this may be the area with the largest potential for future changes in the deficit impact.

Other programs, such as the Public-Private Investment Program and the mortgage programs, have been largely unchanged since November except for a few small repayments in PPIP.

We'll keep an eye on future developments with TARP on Stimulus.org.