Small Banks Struggling Under TARP Rules

The Treasury Department's Troubled Asset Relief Program (TARP) was back in the news on Wednesday. The program's inspector general is warning that smaller banks are having a hard time paying back money they borrowed. Christy Romero, TARP's Special Inspector General, says the banks owe a collective $15 billion and don't have good prospects for raising the money.

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The Troubled Asset Relief Program, or TARP, was cobbled together in 2008 at the height of the financial crisis. The idea was that the government would buy some of the toxic assets weighing down the balance sheets of the nation's banks. Congress ultimately authorized $475 billion to be spent on the program. A report today says much of that money has not yet been paid back to taxpayers. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: TARP was started near the end of the Bush administration. But under President Obama, it morphed into a much more ambitious program. It was used to funnel capital to the banks, the auto industry, the insurance giant AIG among others. Nearly four years later, a lot of that money has been repaid, but not all. Christy Romero, a special inspector general for the program.

CHRISTY ROMERO: There's a significant amount of money that's outstanding, I mean, if we look at how much AIG owes and GM and Ally Financial, which used to be GMAC, as well as there are 434 banks and credit unions still in TARP.

ZARROLI: Romero says about $118 billion is still on TARP's balance sheet. The Treasury Department says those numbers are outdated, and it's only about $100 billion. Tim Massad, assistant secretary for financial stability, says about $15 billion is owed by banks.

TIM MASSAD: A lot of them are smaller banks. And those banks, you know, do have a harder time repaying. That's because they don't have the same access to the capital markets and many of them also have had problems with their real estate investments.

ZARROLI: Massad notes that the money owed by big banks was largely repaid and the government was able to sell some financial stocks at a profit, so he says it will make money overall in the banking sector. As for the program's other beneficiaries, AIG owes about $35 billion. $37 billion is owed by the auto companies, which includes Ally Financial, an underwriter of NPR. Christy Romero says it's not clear how much of that money will ultimately be repaid.

ROMERO: The hope, obviously, for everyone, for every American is that the money comes back. However, right now, the estimate is a loss on some of those debts.

ZARROLI: Romero's report raises other questions about the way Washington has handled Wall Street reform. She says under the Dodd-Frank bill, the Obama administration was given the power to supervise big banks more aggressively. She says that didn't happen. She also says not enough effort was made to rein in executive compensation or to break up banks considered too big to fail.

ROMERO: Instead, what we've seen is a lot of these larger banks have gotten larger than they were since 2008 by gobbling up some of the smaller banks.

ZARROLI: But Tim Massad says the process of overhauling the financial sector has been an enormously complex one, with a lot of vested interests weighing in at every step. As for TARP, he says, it may end up making a small profit or breaking even. But even if it doesn't, he says, that wasn't the point.

MASSAD: I think TARP and the other interventions were extremely effective in not only preventing our financial system from collapsing, but making sure credit is still available to families and small businesses.

ZARROLI: But Massad also acknowledges that TARP is one of the most unpopular government programs in a long time. And in this election year, the idea that TARP also did some good has proven to be a tough sell to voters. Jim Zarroli, NPR News, New York.

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