The first phase of the Troubled Asset Relief Program (TARP) cost taxpayers between $108 and $130 billion and has accomplished little to nothing in reviving the banking sector as a whole, according to Luigi Zingales and Pietro Veronesi, University of Chicago professors who presented their findings at the recent Federal Reserve Bank of Chicago conference on bank structure and competition.
“If the intervention stopped a bank run, it should have created some value in the banking sector,” Veronesi said, adding the so-called “Paulson Plan” came at a significant cost to taxpayers. Instead, the intervention—launched near the end of the Bush administration under Bush Treasury Secretary Henry Paulson—helped just a handful of financial institutions, most notably Citibank, while other banks received little benefit.
“This result might not be surprising: The plan was enacted to benefit the economy, not the banking sector,” Veronesi added. “Yet it is hard to see how the former objective can be accomplished without the latter. If the goal was to alleviate the undercapitalization of the banking sector and in doing so regenerate the incentives for banks to lend to the economy, we should [see] banks’ value increase.”
More Costly than Alternatives
In looking at bank values, Veronesi and Zingales considered not just the stock prices of the banks before and after the TARP financial injections but also changes in the debt levels of the financial institutions. Their review showed the value of banks didn’t increase despite the government intervention.
Veronesi stopped short of calling the plan useless, pointing out it may have helped the economy in other ways, perhaps by stopping panic among investors. But even such help was primarily confined to investors in just a handful of financial institutions, according to Veronesi and Zingales.
In addition, Paulson’s plan was far more expensive to taxpayers than other potential economic plans that could have been used to shore up the nation’s financial institutions, according to Veronesi.
Phil Britt ([email protected]) writes from South Holland, Illinois.