The Troubled Asset Relief Program

March 17, 2010

Today CBO released the third of its statutory reports on transactions undertaken as part of the Troubled Asset Relief Program (TARP). This report discusses CBO’s estimate of the costs of those transactions initiated as of February 17, 2010, as well as possible future transactions that could be undertaken with the available authority.

CBO currently estimates that the cost to the government of the TARP’s transactions—including investments, grants, and loans—completed, outstanding, and anticipated will amount to $109 billion. Much of that estimated cost is associated with the assistance provided to American International Group (AIG)—at a cost of about $36 billion—and the automotive industry—at a cost of about $34 billion. CBO estimates a very small net gain to the government from the capital purchase program, in which the Treasury purchased more than $200 billion in shares of preferred stock from hundreds of financial institutions.

The Office of Management and Budget (OMB) estimates that the total cost of the TARP’s transactions will amount to $127 billion. OMB’s estimate is $18 billion higher than CBO’s estimate principally because of differences in the estimated cost of assistance to AIG and in the amount expected to be disbursed by the Home Affordable Modification Program (an initiative that provides direct payments to mortgage servicers to help homeowners avoid foreclosure).

Both CBO and OMB value the TARP’s investments by discounting to the present the projected cash flows stemming from each investment, using a discount rate that captures both the time value of money and the premium that a private investor would require as compensation for the risk of the investment or commitment. The resulting “net present value” is the cost or gain projected for the investment and represents an estimate of its market value.

Currently, the Secretary of the Treasury has the authority to purchase and hold up to $699 billion in assets at one time. CBO estimates that $344 billion of that authorized amount is outstanding or will be disbursed before the program expires on October 3, 2010. (That figure includes an estimated $45 billion that is projected to be used for purposes not yet specified.) 

This report was prepared by Avi Lerner of CBO’s Budget Analysis Division.