April 17, 2009
The Troubled Asset Relief Program (TARP) gives the Department of the Treasury authority to purchase or insure up to $700 billion of outstanding assets at any one time. Under the Emergency Economic Stabilization Act of 2008, which provided that authority, the federal budget is supposed to reflect an estimate of the ultimate net cost of the transactions for the TARP as opposed to recording the gross cash disbursements under the program (and later recording cash receipts for any earnings or purchase redemptions). Broadly speaking, the estimated net cost is the purchase cost minus the present valuecalculated using an appropriate discount factor that reflects the riskiness of the assetsof any estimated future earnings from holding the assets and the proceeds from their eventual sale.
CBO currently estimates that the net cost of using the TARPs full $700 billion in purchase authority will total $356 billion$336 billion to be recorded in 2009 and $20 billion to be recorded in 2010. That estimate amounts to a roughly 50 percent net subsidythat is, roughly one-half of the gross purchase authority. CBOs most recent estimate of the TARPs cost is higher than what we presented in January: by $152 billion for this year and $15 billion for next year (at that time, our estimated net subsidy was approximately 27 percent of the $700 billion purchase authority). The revisions stem from three factors: changes in financial market conditions, new transactions, and a small shift in the anticipated timing of disbursements.
By the beginning of March, when CBOs most recent estimate was completed, market yields on securities issued by the firms that had received TARP funds were higher than they were a few months earlier. We use those yields in the present-value calculations to reflect the riskiness of the governments loans and investments. Because those yields have risen, the estimated subsidy cost of the Treasurys purchases of preferred stock, asset guarantees, and loans to automakers has also increased. Also, during that period, the Treasury announced additional deals with Bank of America and American International Group (AIG), as well as participation of up to $50 billion in the Administrations foreclosure mitigation plan, all of which involve higher expected subsidy rates than the 27 percent average subsidy in our January projections. Finally, CBO now assumes that more transactions would occur after October 1, which pushes the recognition of more of the subsidy cost into fiscal year 2010.
Because the ultimate cost of the TARP depends directly on market value of the financial assets involved, that net cost is very uncertain. The eventual cost may well be significantly different than CBOs current estimate, and could be either higher or lower than the roughly 50 percent subsidy embodied in our most recent projections.