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

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. The subsidy, defined as the difference in return between the benchmark and TARP investment, was especially high for riskier and larger banks. The ex-post renegotiation of TARP contract terms contributed to the subsidy. Banks that aggressively renegotiated their contracts paid much higher levels of dividends and CEO compensation soon after the repayment. Our study does not evaluate the net social benefit of TARP, rather it highlights an important cost which should be a key input in that evaluation