![]() ![]() To evaluate whether banks paid a fair return on TARP investments or not, we compared returns on TARP with returns earned on securities of similar risk in private markets. The “fair” market-based return on such investments must earn sufficiently high returns. The title of your paper asks,”Did banks pay a ‘fair’ return to taxpayers on TARP?” How did you go about answering that question?īailouts, by definition, occur in bad states of the world, that is, when risk is high. The return is “fair” only if it is commensurate with the risk it imposes on the investors. A common refrain used by a number of bankers is that we returned every penny of TARP money back to the shareholders, with interest.īut such a narrative misses the most basic point of finance theory: Was the return on TARP sufficient to compensate the taxpayers for the risk that they took? In a private market transaction, investors demand higher returns for high-risk investments. On an aggregate basis, these investments were returned back to the taxpayers with some positive return. Taxpayers poured hundreds of billions of dollars into the financial system in 2008 to assist financial firms that were struggling from the collapse of the mortgage market. What’s the problem with the way the TARP returns are often described? Purnanandam and Ross doctoral student Thomas Flanagan recently published a paper examining the issue, and Purnanandam discussed their research: “The real question is whether the return was good enough for the risk, not whether it was positive.” Unfortunately, this narrative has found a large audience and it misses the point,” said Amiyatosh Purnanandam, professor and chair of finance. ![]()
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