Robert Bennett: A happier ending than I anticipated, AIG pays back TARP money, 17 billion in interest

Published: Monday, Dec. 17 2012 12:00 a.m. MST

FILE - In this Friday, Aug. 3, 2012 file photo, Specialist Donald Himpele, foreground second left, resumes trading in AIG stock on the floor of the New York Stock Exchange. The U.S. government is selling more of its shares in insurer American International Group Inc. in a move that should decrease its holdings below a majority stake for the first time since the $182 billion bailout in 2008. AIG said Sunday, Sept. 9, 2012 that the Treasury Department was selling $18 billion worth of AIG common shares. The department will grant underwriters a 30-day option to purchase $2.7 billion more if there is demand. The shares will be sold to institutional investors.

Richard Drew, Associated Press

Enlarge photo»

Last week, tucked away inside the bowels of a few national papers, there was an announcement that AIG had repaid, with interest, all of its TARP money. Many don't know what TARP means and fewer know what AIG means, but the event deserves comment.

TARP is the acronym for Troubled Asset Relief Program, an authorization of $700 billion passed by Congress to stablize world financial markets after Lehman Brothers collapsed and set off a global panic in 2008. Critics called it a "bank bailout" and claimed that it simply rewarded bad behavior while adding $700 billion to the national debt.

AIG is an insurance company that had most of the policies that finanical institutions had taken out to protect themselves in case there was a collapse. AIG received TARP funds because it was overwhelmed by the avalanche of claims filed against it. That, too, was heavily criticized.

Four years have passed since then. Has TARP turned out to have been a good thing?

Yes. When world leaders learned that the U.S. Treasury was prepared to put as much as $700 billion into the financial system to stabilize it, the panic stopped. TARP did its job. But that's not the end of the story.

The government didn't give $700 billion to banks and insurance companies with no strings attached, as the term "bailout" would imply. The "A" in TARP stands for assets, which the government acquired.

The plan was to sell them for what they could bring once they were no longer "troubled" assets, when markets had settled down. No one one knew exactly how much those assets would yield in the end, but every projection showed that the final cost of TARP would be far less than $700 billion. I expected it to be $100 billion, because I thought the amount that would be recovered would be around $600 billion.

I was too pessimistic. As last week's announcement shows, taxpayers have done far better than that. First, there was less money at risk, as the total number of TARP dollars paid out was less than $500 million. Once the markets calmed down, the amount needed to stabilize the system went down as well.

Next, TARP repayment schedules included significant interest charges. Anxious to avoid as many of those charges as they could, the biggest banks returned their money as soon as they could. A year ago, Treasury estimated the final total cost of TARP would be less than $50 billion. The money that was still owed had gone to some smaller banks, AIG and the auto companies, where the prospects for full repayment looked less likely.

But AIG has come through, finally paying back all of the TARP money it received plus about $17 billion in interest. If we exclude money given to the auto companies, TARP has been a money maker for the government. It's a story with a happier ending than even I anticipated.

The details of TARP were not widely understood and it was widely opposed. Those leaders who did understand how serious the problem was, and how well TARP was designed to deal with them, did the right thing and moved ahead anyway. We were in the midst of a presidential campaign, but that was temporarily set aside. Action requested by George W. Bush was backed by Barack Obama and John McCain, and, when the bill stumbled on the legislative path, was saved by Harry Reid and Mitch McConnell. In a time of genuine crisis, party didn't matter.

There is a lesson here for those negotiating over the fiscal cliff.

Robert Bennett, former U.S. Senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.

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