Did Banks Pay Fair Returns to Taxpayers on TARP?

Journal of Finance, Forthcoming

48 Pages Posted: 26 May 2020 Last revised: 13 Oct 2023

See all articles by Thomas Flanagan

Thomas Flanagan

Ohio State University (OSU) - Fisher College of Business

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: May 7, 2020

Abstract

Financial institutions received investments under the Troubled Asset Relief Program (TARP) in a bad state of the world but repaid them in a relatively good state. We show that the recipients paid considerably lower returns to the taxpayers compared to private market securities with similar risk over the same investment horizon, resulting in a subsidy of over $50 billion on the preferred equity investment by the government. Ex-post renegotiation of contract terms limited the upside gains received by the taxpayers in good times and contributed to the subsidy. These findings have important implications for the design and implementation of future bailouts. Our simple methodology for calculating the subsidy can be applied to evaluate the financial costs of other bailouts.

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). Journal of Finance, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3595763 or http://dx.doi.org/10.2139/ssrn.3595763

Thomas Flanagan (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
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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