Did Banks Pay Fair Returns to Taxpayers on TARP?

Financial institutions received investments under the Troubled Asset Relief Program 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 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 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.