Amiyatosh Purnanandam | University of Michigan

Did Banks Pay “Fair” Returns to Taxpayers on TARP?

Financial institutions received billions of dollars from the U.S. Treasury in the form of preferred equity under the Troubled Asset Relief Program (TARP) in 2008. Investments were made during a bad state, but the repayments came in a relatively good time. Comparing TARP’s realized returns to private market securities with similar or lower risk over the same time period, we show that the recipients paid considerably lower returns to the taxpayers than the benchmarks. Consequently, the recipient banks enjoyed a subsidy of over $50 billion. The ex-post renegotiation of TARP contract terms were beneficial to the recipients, and soon after the repayment banks increased dividend payout and CEO compensation. While we do not evaluate the net social benefit of TARP, our results challenge the oft-cited narrative that taxpayers made profits on TARP investments from a purely financial standpoint.