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February 2nd, 2010

TARP: Tax and Revenue Producing

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I’ve stumbled across a couple of seemingly conflicting stories this afternoon that have left me asking myself, “Does Washington never want TARP to be fully repaid?”

Sounds crazy, right? While we know taxpayers want the money to be paid back, we thought Washington’s TARP tax — known as the “financial crisis responsibility fee” — was an assurance that the country wouldn’t lose a dime on the money that was pledged to the banks, both large and small.

But it seems that may no longer be the case. Treasury Secretary Timothy Geithner indicated today that if all the TARP money isn’t repaid within 10 years, that the Treasury could extend the tax to ensure it would be:

The U.S. may extend a $90 billion fee on the country’s largest banks beyond the planned 10 years if the government hasn’t recouped the cost of the financial rescue, Treasury Secretary Timothy Geithner said Tuesday.

“The [bank] fee can and will be extended until every penny of taxpayer assistance to the financial system has been repaid and the cost of the rescue to taxpayers is zero,” Mr. Geithner said.

This is where things get confusing: The Treasury Secretary also announced that portions of the TARP money would be redirected to help prevent foreclosures, stem job loss, and increase the number of small business loans:

The Treasury said along with a new “focus on the challenges of helping families avoid foreclosure,” TARP will aim to bring down unemployment from record highs. Other initiatives in the budget include $30bn in TARP funds to help community and smaller banks extend credit to small businesses and $500m in efficiency savings in the Treasury Department, including using paperless processing for electronic benefit payments and tax collections.

Besides some of these ideas having little or nothing to do with what TARP’s designed to do (help banks shed troubled assets), how will the TARP money ever be fully repaid if we keep spending and redirecting the money to new ideas?

If the banks are being made to repay the money they were “given” — via the bank tax and the preferred stock/dividend agreement that was part of the original terms — is Washington prepared to tax the new recipients of TARP funds (as described above by Geithner) in the same manner? Given the fact that several parties who received TARP funds were not made to pay them back (GM, Chrysler, AIG, etc), we doubt it.

“How is Washington making decisions on who has to repay TARP and how they must do so?”

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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