UNC Kenan-Flagler Business School


The true cost of TARP


Amid cries of “Where’s my bailout?” the Troubled Asset Relief Program (TARP), which infused cash into 707 American banks at the height of the financial crisis, has been painted by many as simply a big gift from taxpayers to banks.

But Anil Shivdasani, Wachovia Distinguished Professor of Finance at UNC Kenan-Flagler, has studied the numbers and says that it’s much more complicated than that.

His research found that the unhealthiest banks didn’t get the capital, and those that did get the cash had to pay a price. In October 2008, when TARP was signed into law, Shivdasani had a front-row seat on the banking crisis. On academic leave, he was working as a managing director in the investment banking division at Citigroup Global Markets Inc., advising clients such as banks and insurance companies on strategic decisions — for example, which sectors to invest in.

So when he returned to UNC Kenan-Flagler, the TARP program and its effects on the financial system were at the top of his mind.

“This had been the largest financial bailout in global history, and it was uniquely structured. It was different from Sweden’s bailout, which created a good-bank, bad-bank structure. It was different from Japan, where all banks were forced to take a bailout,” Shivdasani says. “So we thought it was important to document some systematic facts about what happened. A lot had been written in the press, and it tended to be one-sided, so we wanted to see if the facts actually supported the common perceptions.”

After spending hours poring over financial statements and stock returns, Shivdasani and PhD candidate Dinara Bayazitova found that many of the perceptions about TARP were wrong. “The general premise out there in the media, among politicians and certainly the public, and even in some academic work is that TARP was essentially a gigantic handout to the banks — that these banks were given taxpayer money, and that very little was asked in return for that capital. But our study shows that this view is entirely incorrect,” Shivdasani says.

A key finding of Shivdasani’s work is that TARP supported banks that were economically sound but caught in a financial crisis. With the capital markets frozen, they had no way to roll over billions of dollars of debt. “We show that banks financed by TARP were economically healthy; they had made better loans, had better assets and had made better credit decisions. But they were having trouble with their balance sheets because of the capital crisis. TARP did not support fundamentally weak institutions.”

He compares the banks that accepted TARP to a homeowner who has a lot of equity in his house and needs to refinance but can’t because no banks are lending. He likens economically weak institutions to a homeowner who is significantly underwater on his mortgage and is not making payments.

“From a policy perspective, you want to support the fundamentally healthy owner. That is what TARP did.” The research also shows that the relief came at a cost to banks. “TARP was not free money by any means; it came with a lot of strings attached, such as restrictions on dividend payments and on executive compensation,” Shivdasani says.

For example, he found that banks that accepted more than $5 billion in TARP funds paid a price in the form of a sharp drop in their stock prices directly after the passage of House Bill 1586, which imposed a retroactive excise tax of 90 percent on all employee bonus payments, sparked by outrage over retention bonuses paid by AIG.

“Banks that did not take TARP showed stock gains at the passage of this bill,” Shivdasani says. The stock-value drops for TARP banks show the indirect costs to banks of government interference, he says. Over the summer, Shivdasani presented this work to the Financial Intermediation Research Society conference in Italy, a premiere conference for banking research, and to the Western Financial Association, a leading finance conference.