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Sunday, January 17, 2010

Redirecting Troubled Asset Relief Program (TARP) Funds to Other Uses

Marc Labonte
Specialist in Macroeconomic Policy

Edward V. Murphy
Specialist in Financial Economics

Baird Webel
Specialist in Financial Economics

Following a boom and bust in real estate and a meltdown in financial markets, Congress enacted a program to purchase troubled assets from financial institutions in October 2008. The Troubled Asset Relief Program (TARP) was created by the Emergency Economic Stabilization Act (EESA, P.L. 110-343). Under TARP, the Secretary of the Treasury is authorized to purchase up to $700 billion of "troubled" assets, including any asset that the Secretary, in consultation with the Chairman of the Federal Reserve, believes the purchase of which will contribute to financial stability. The amount outstanding under TARP is currently far below this limit, and Treasury has announced plans for no more than $550 billion to be outstanding in the future. 

Some policymakers have proposed redirecting funds under the Troubled Asset Relief Program to finance new policy proposals. The Helping Families Save Their Homes Act (S. 896/P.L. 111-22), redirected $1.3 billion from TARP to finance modifications to the Hope for Homeowners Program. The Wall Street Reform and Consumer Protection Act (H.R. 4173), which passed the House, would redirect $20.8 billion of TARP funds to offset $10.4 billion of various provisions of the bill. The Jobs for Main Street Act (H.R. 2847), which passed the House, would redirect $150 billion of TARP funds to offset $75 billion of the bill's spending and tax provisions. 

When TARP was created, the Treasury did not collect and set aside $700 billion of revenue to finance the program—the Treasury Secretary was simply given legal authority to purchase $700 billion of assets. Therefore, Treasury holds no unused money under TARP that can be redirected toward new policy proposals. Like most spending programs, TARP expenditures are financed from general revenues. If the Treasury Secretary wished to purchase more TARP assets, it would be necessary to first issue federal debt (thereby increasing the budget deficit) to do so. 

Proposals to redirect TARP funds to finance other proposals rely, in essence, on a reduction in the amount that the Treasury Secretary is authorized to purchase under TARP. Since TARP is not near its ceiling today, any proposal that reduces TARP authority by less than $150 billion would not force TARP asset holdings to be reduced from the currently planned size. Thus, reducing the authorized size of TARP by less than $150 billion does not increase the revenues flowing to the Treasury because it does not force Treasury to sell any of the assets TARP currently holds. In effect, a new policy proposal that increases spending or reduces revenues would be deficit financed if it included a reduction in TARP authority of less than $150 billion under Treasury's current plan (since it would not result in any increase in revenues via a reduction in TARP assets outstanding). 

The scoring of proposals to redirect TARP funds, however, differs from the actual effect of these proposals. For official scoring purposes, the 2009 budget resolution instructs CBO to use the baseline from March 2009. This March baseline assumed all $700 billion of TARP authority would be used in the future, as opposed to the $550 billion currently planned by Treasury. Therefore, a bill financed by redirecting any TARP funds would officially be scored as being offset by a decline in overall anticipated federal spending via lower future TARP purchases, although under current Treasury plans, future TARP purchases would not actually be reduced. The offset would not be one-for-one, however. Under Section 123 of EESA, the cost of asset purchases are scored as the net present value of the subsidy in the loan, modified for risk, and are not scored on a cash flow basis. For future TARP spending, CBO assumes a subsidy rate of 50%. Therefore, a dollar reduction in TARP authority is scored as reducing the official budget deficit by only 50 cents.

Date of Report: January 6, 2010
Number of Pages: 7
Order Number: R41001
Price: $29.95

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