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TARP’s Illusory Profits

e21 | April 26, 2012

The Troubled Asset Relief Program (TARP) was recently claimed by the Treasury department to be likely to recoup the money it spent trying to prop up the economy. While that would be wonderful news, judging the impact of a huge financial program like TARP on the federal budget is much more complex that simply totaling dollars in and dollars out.

Daniel Indiviglio of Reuters applied some basic financial accounting techniques to determine that TARP is actually likely to cost the taxpayers hundreds of billions of dollars.

The Treasury says the Troubled Asset Relief Program might turn a profit. But the agency’s fuzzy math wouldn’t fly with any sensible portfolio manager. What it calls a gain looks more like a loss of at least $230 billion.

Treasury’s rosy projections aren’t half as bad as its methodology. The government declares a return when an investment’s payments exceed the initial cash outlay. That boldly disregards the cost of money and its value over time.

Compare that to TARP, which had seven broad components. Start with the banks. Treasury estimates an ultimate profit of $22 billion. Even if that’s achieved by year’s end, taxpayers will have earned a paltry annualized return of 2 percent. Simply investing in the S&P 500 index would have earned 14 percent a year. Worse, applying Buffett’s Goldman return as the risk-based cost of capital turns the net present value of the bank rescue into a loss exceeding $15 billion.

Adding up the different components gave Indiviglio the $230 billion figure. Read the whole thing for the rest of the math.

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