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To: Members, Financial Services Committee
From: Barney Frank, Chairman
Today the Treasury announced that 10 of the largest financial institutions participating in the Capital Purchase Program (CPP) will be allowed to repay the $68 billion investment made by American taxpayers.
That does not alter ‘taxpayer’ risk. They lose once private capital is gone in either case.
That is good news on three fronts. First, it means the program is working and has begun to help restore stability to our vital financial system.
The ‘improvement’ had nothing to do with TARP. It may have been helped by the FDIC not closing down these institutions when capital was deemed deficient, but the FDIC could have kept those institutions open under those same terms and conditions as imposed by TARP.
Second, it means that the government will have additional resources to address continuing needs without having to ask taxpayers for more money or increasing borrowing.
Functionally the FDIC can impose the same terms and conditions. The difference is that the FDIC is ‘funded’ by a tax on banks, rather than TARP being an obligation of ‘general revenues.’ However, the FDIC is guaranteed by the government and the FDIC tax on banks that is passed through to the general public might be more regressive than the average IRS tax.
Also, regarding ‘borrowing’ the TARP funds advanced to banks add the reserves that are used to buy the additional government securities.
And, third, it means that that the taxpayer protections and compensation restrictions that Congress insisted be included in the original legislation are having the intended effect – taxpayers are participating in the upside as these institutions recover and raise additional private capital in order to exit the government program.
Again, functionally the FDIC could have imposed the identical terms and conditions.
In sum, todayâ€™s announcement means that over one third â€“ approximately $70 billion – of the $199 invested through the CPP has been, or will soon, be repaid. In addition CPP recipients have already paid an additional $4.5 in preferred stock dividends during the past seven months. That means that almost $75 billion has already been earned or repaid. Further those who repay have the right to repurchase the warrants held by Treasury at current market value â€“ further increasing the return to taxpayers.
Yes, it has functioned as a tax on banks and the private sector in general, thereby reducing aggregate demand during a punishing recession that has resulted from government’s failure to sustain aggregate demand.
Congratulations- job well done!!!