Barney Frank’s TARP Accounting Shenanigans

Here is a simple math problem. You loan a friend $1,000. According to your agreement he pays you back half of the money six months later. He also adds an extra $50 as a thank you for being patient with him. Have you made a profit?

According to Rep. Barney Frank’s math you would have made a $50 profit. Even though you are still out $450 of your original loan, the logic of the new “TARP for Main Street Act of 2009” would say you have earned money.

The proposed accounting shenanigan based on President Obama’s assertion last month that dividend payments and interest on the TARP loans returned had earned the government a profit. The problem is that the TARP bailout cost the government $700 billion, plus interest on the loans it had to take out to spend that money. Until the full cost is covered, it is inaccurate to say we’ve made a profit on this program.

Nevertheless, Rep. Frank has introduced the TARP for Main Street Act, a program that would take the TARP dividend payments—the “profits”—and put them into a fund to finance more public housing programs. According to the proposal, $1 billion of the dividends would go into a fund for low-income rental housing. Another $1.5 billion would establish a “neighborhood stabilization” fund. The bill also wants to spend remaining TARP money, $2 billion for delinquent mortgages and $2 billion to “stabilize multifamily properties that are in default or foreclosure.”

This really is not a complex accounting problem. Profit only comes when you earn more than you’ve spent. To date, Treasury has given away $620 billion of the TARP bailout money and only gotten $70 billion of it back, plus interest and dividends. As of today, the Treasury has received $6.7 billion in dividend payments. That looks like this:

$700 – $620 + $70 + $6.7 = $156.7 billion

The government only has $156.7 billion of the TARP money on hand right now. Which means until the remaining $543.3 billion has been returned, the Treasury isn’t even close to making a profit. Rep. Frank’s dubious scheme is set to be discussed at a financial services hearing tomorrow.

The idea blatantly ignores the text of the Emergency Economic Stabilization Act (the bill that set up TARP) that wasn’t designed to fund housing programs. It ignores provisions that require TARP money go back to the Treasury general fund. And it completely disregards the President’s stated desire to be more fiscally responsible and cut down on the national deficit.