December 10, 2009
Yesterday CBO issued a cost estimate for H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, as amended and reported on Tuesday by the House Committee on Rules. In the letter transmitting our estimate, we explained that the estimated savings from the bill's provision for reducing the maximum amount that may be outstanding under the Troubled Asset Relief Program (TARP) may be attributable to the improvement in financial conditions this year rather than enactment of the legislation.
The TARP was created by the Emergency Economic Stabilization Act of 2008 (EESA) in October 2008 to promote stability in financial markets through the purchase and insurance of "troubled assets." Currently, the Secretary of the Treasury has the authority to purchase and hold up to $699 billion in assets at one time (the original level of $700 billion was reduced by the Helping Families Save Their Homes Act of 2009). Initially, that authority was set to expire on December 31, 2009; however, in a letter addressed to the Speaker of the House and the Senate Majority Leader yesterday, the Secretary exercised the option provided in EESA to extend TARP authority until October 3, 2010.
The version of H.R. 4173 approved by the House Committee on Rules includes a provision that would reduce the maximum amount that may be outstanding at any time under the TARP by $20.8 billion. In its March 2009 baseline projections, CBO expected that the Treasury would use all of the authority available under the TARP. That baseline was adopted as the Congress's budget resolution baseline for scorekeeping purposes and is used by CBO for estimating the budgetary impact of legislation until the Congress adopts a new baseline for scorekeeping purposes.Usingthe March baseline's estimated average subsidy of 50 percent for the use of uncommitted TARP authority, the current legislation's proposed reduction in authority of $20.8 billion would result in outlay savings of $10.4 billion.
However, that reduction in spending relative to the March baseline might occur even in the absence of this legislation because financial conditions have improved considerably since March. CBO's August report updating the budget outlook reduced the projected use of TARP funds, but that August baseline is not used for Congressional scorekeeping purposes. Moreover, the Secretary of the Treasury noted in his letter yesterday that "beyond these limited new commitments, we will not use remaining [TARP] funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability." If CBO were to estimate the impact of the TARP provision in this legislation taking into account current financial conditions, the agency would not expect that the full amount available under the TARP's ceiling on outstanding investment would be fully utilized. Thus, the savings estimated relative to the budget resolution baseline arise from a reduction in the Secretary's authority to commit funds that would probably not be committed anyway.