TARP Actally Returns Profit So Now What To Do About It?

(MoneyWatch)  The unpopular Troubled Assets Relief Program (TARP) was about the last thing President Bush did while in office. This was the seven hundred billion dollar fund set up by the Federal Government to buy bad assets from banks to keep them solvent. Of course it has not necessarily been implemented that way which is one of the reasons it has been controversial. Money from the fund has been used to bail out GM and Chrysler, fund Cash for Clunkers and help non-financial companies.

Now it is being reported that the banks who received funds are actually paying it back with some profit to the Federal Government. The New York Times is reporting that "The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually..". Fifteen percent return over the last year is incredible considering how bad the markets have done.

Of course one of the arguments with the whole plan was what to do with the profits from it. Representative Barney Frank (D-MA), chair of the Financial Services Committee in the House, has proposed spending these profits. He would like to work on health care and foreclosure relief with it.

The counter argument for that is this is money that the government borrowed. TARP along with the "Stimulus" bill is driving the massive 2009 deficit of almost $1.6 trillion. To many especially Republican legislators it makes little sense to spend this money rather then using it to pay down the debt. There has already been a great deal of money set aside for foreclosure and mortgage relief. Health care reform is supposed to be paid for and be budget neutral.

The Treasury has been taking the view that they can use the money themselves as part of the TARP program. They have interpreted the act to allow them free use of the money as long as total fund remains below $700 billion. Elizabeth Warren the Chair of the Congressional Oversight Panel recently said this to PBS's Nightly Business Report:

"I think this is a serious problem and the best I can say is Congress gets what Congress wrote in this statute. The statute speaks about a ceiling of $700 billion above which Treasury cannot go. Treasury takes the position that that means when money comes back to pay down, that that gives Treasury as they describe it more headroom to be able to use that money in other places where it's needed. Quite frankly, if that's not what Congress wants, then Congress has to be more specific in the legislation."
Congress most likely did not want the Treasury to use the money this way preferring it be put back into the general fund for use or to pay down the debt.

The Treasury's approach is making it able to prepare for the future. Right now there is no guarantee that the economy is going to recover soon. This money might be better set aside in case there is another down turn or a need to help banks or companies again. There continue to be major bank failures of all sizes across the country and economic growth is anemic.

The TARP program right now looks successful as banks are paying back the money with profit. There are still companies out there who have not who received significant funds. In the long run the program may end up being a net negative for the government. Proper analysis of its effectiveness will have to wait for a few years as it is seen how the U.S. economy recovers.

Photo from Flickr user Photos8.com. Work is in the Public Domain.