TARP, the Forbidden Bipartisan Success

Brainteaser: name the last major law to draw meaningful bipartisan support in Congress. Tough question, isn't it? The answer is the Troubled Asset Relief Program, better known as "the Wall Street bailout.''

Hard to believe now, but before President Bush signed the $700 billion rescue plan into law in October 2008, it passed the House by a 228-205 vote, with 91 Republicans in support, and the Senate by a 74-25 vote, with 32 Republicans. But you won't hear much bragging. The loudest theme on the fall campaign trail is full-throated outrage at the depravity of the bailouts and those who voted for them.

The political fallout from TARP has gotten steadily worse. It has given rise to the Tea Party and contributed to the record number of incumbents defeated in primaries. Many more will go down in November. Yet the economic news about TARP has gotten consistently better. It will cost taxpayers a fraction of that $700 billion, and may end up costing them nothing at all.

The latest good news comes from one of the supervillains of the crisis, the giant insurer AIG, which required three separate bailouts totaling $182 billion. Barney Frank, chairman of the House Financial Services Committee, believes he can pinpoint the day when public disgust with government boiled over: March 14, 2009, when word leaked that top AIG executives would get their bonuses, even though taxpayers were keeping the company afloat.

As the price of saving AIG, the government took it over. The Fed and the Treasury still have $130 billion in the company outstanding. But AIG is doing better. Its CEO predicts earnings of $6 billion to $8 billion this year. This week, Treasury will announce plans to begin the process of returning it to independence. At a plausible valuation of $60 billion (offered by an investment banker familiar with insurance companies) taxpayers could eventually recoup $55 billion. AIG will also soon divest itself of its US life-insurance unit, Alico, expected to fetch $25 billion or more in an initial public offering, and its Asian insurance operation, AIA, going to Prudential for $15.5 billion.

Through the bailout, the government took on AIG's toxic assets, which aroused a furor when counterparties like Goldman Sachs were paid off in full, even though they didn't deserve to be. These assets, $21 billion of mortgage-backed securities and $24 billion of credit-default swaps, were placed in privately managed entities (essentially hedge funds) innocuously named Maiden Lane II and Maiden Lane III. Both have exceeded expectations: taxpayers should fully recoup their investment, along with a profit currently standing at $10 billion. It's a good bet that the full sum doled out to AIG will eventually be returned.

AIG drew the most from TARP. But other recipients have also fared well. All the big Wall Street banks have fully repaid the government with interest. To date, taxpayers' profit from these banks stands at around $26 billion. Small banks still hold about $20 billion from TARP, but this, too, is likely to be repaid with a profit. The government also invested $50 billion in GM, which the automaker will begin repaying after its initial public offering in November.

Not every TARP program over-performed. The $50 billion mortgage-modification effort -- money never expected to come back -- mostly failed. But even this has proved perversely economical, since the program won't draw its full allotment.

The Congressional Budget Office recently lowered its estimate of what TARP will cost taxpayers to $66 billion. With interest, dividends, anticipated profits, and the unexpectedly small commitment to housing -- not all reflected in the CBO's conservative estimate -- it is possible to envision an outcome in which TARP costs little or nothing.

That's good news for taxpayers -- but they probably won't learn about this surprising bipartisan achievement from elected officials, who long ago judged any association with TARP as deadly.

Testifying before Congress last week, Treasury Secretary Tim Geithner gently tweaked lawmakers for flip-flopping. "A lot of people who voted for TARP decided later that they had to distance themselves from that vote by disparaging the program,'' he said. "But I think they should be proud of the votes they cast. They were on right side of history.'' Politically that sounds nuts, but the numbers back it up.

Joshua Green writes a weekly column for the Boston Globe.