Did Banks Pay 'Fair' Returns to Taxpayers on TARP?

63 Pages Posted: 26 May 2020 Last revised: 23 Mar 2021

See all articles by Thomas Flanagan

Thomas Flanagan

University of Michigan, Stephen M. Ross School of Business

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: May 7, 2020

Abstract

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.

Keywords: Bailout, TARP, CPP, preferred equity

JEL Classification: G21,G28

Suggested Citation

Flanagan, Thomas and Purnanandam, Amiyatosh, Did Banks Pay 'Fair' Returns to Taxpayers on TARP? (May 7, 2020). Available at SSRN: https://ssrn.com/abstract=3595763 or http://dx.doi.org/10.2139/ssrn.3595763

Thomas Flanagan (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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