[Updated Oct 5 2010] Marketwatch reports that the total final cost to taxpayers of the much-maligned $700 billion Troubled Asset Relief Program (details below) will be around $50 billion, the Treasury Department estimated on Tuesday. The two-year TARP program, which officially expired on Sunday, initially used government money to make capital injections into large and small financial institutions to stabilize the financial system. Eventually it expanded into other programs including a spending endeavor seeking to help lenders and borrowers modify mortgages and avoid foreclosures. According to a recent Treasury transactions report, earlier this week, roughly $255 billion is still outstanding.
The question is does the total cost reflect all the banker bonsues? Main Street bailed out Wall Street, but was it worth it?
The revised financial sector rescue plan was formally announced by the Obama administration today and it could could cost upward of $1 trillion to implement. The plan involves a mix of government and private capital, aimed at stabilizing the U.S. financial system by injecting capital into banks (via a “bad bank”), helping to determine prices of toxic assets weighing on firms’ balance sheets and stemming foreclosures
“We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion and expand it based on what works,” said Treasury Secretary Geithner. “Together with the Fed, FDIC and private sector, we will establish a Public Private Investment Fund that will provide government capital and government financing to help leverage private capital to help get private markets working again for the legacy loans and assets that are now burdening the entire financial system.”
So in addition to the $1 Trillion dollar stimulus package, the Obama administration has now laid out it’s plan to deal with the financial and economic crisis. Do you think it will work or is it just a rehash of ideas that have not worked in the past? The Market’s initial reaction to the plan has been very negative with the Dow falling over 300 points. Early comments from analysts criticize the revised plan as not providing any real new initiatives and being short on detail on the private-public partnership viability. It has clearly failed to provide the confidence factor that the market was looking for.
“We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners,” wrote Larry Summers, director of Obama’s National Economic Council, to congressional leaders last month.
The government has already committed $350 billion of the $700 billion financial-sector bailout fund approved by Congress last fall, and it is expected that the Obama administration will ask Congress for the remaining funds and perhaps more under the revised plan.
Fannie and Freddie, who were bailed out last year have already had tens of billions of taxpayer funds (with much more committed) pumped into them in a bid to try and prevent the collapse of the entire mortgage market. Under the revised plan they will use their widespread network to implement national standards for loan modifications. This includes a mechanism to determine the value of homes facing foreclosure – something that has proven hard to do – which could speed negotiations with troubled borrowers. Geithner is also expected to express support for legislation that would allow judges to modify the terms of mortgages in bankruptcy court.
Using Fannie and Freddie would mean the government giving more taxpayer dollars to the companies as an incentive to modify loans. This includes a plan to set a government backed national mortgage rate of 4% for conforming loans that the companies purchase, and allowing people to refinance or get new loans at this rate. However, this assumes that people will meet the criteria to get this new rate.
Overall, the new administration had to revamp the TARP, especially if congress approval for the remaining funds was needed. Reducing foreclosures and setting a very low borrowing rate will alleviate some of the housing problems. In addition to the Stimulus package – which is aiming to tackle unemployment and economic growth – these are the strongest and probably final measures the government can take. For all our sakes, let’s hope both these rescue plans/packages work.
[Update]. From the WSJ, here is good graphic summarizing elements of the proposed plan:
~ China Flexes Economic Stimulus Muscle