On Wednesday, Treasury Secretary Tim Geithner said he extended the $700 billion bank bailout known as TARP for another ten months because, "the recovery of our financial system remains incomplete. And near-term shocks to that system could undermine the economic recovery we have seen to date." 

Reasonable enough. Yet just days before, Bank of America (NYSE:BAC) repaid its TARP investment in full, and it appears Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) aren't far behind. Why the $700 billion credit card needs to remain on red alert while lifelines at some of the most troubled banks are being removed is curious. It's akin to preparing for hurricane season by removing the plywood from hardware stores.

Round 2
A few days before Geithner extended TARP, the White House announced that bank repayments and "having gotten the financial crisis under control" means TARP money can be diverted to other ventures such as tax cuts, job creation, and infrastructure projects. This shouldn't be confused with the $787 billion stimulus package -- still 78% unspent as of late September -- that already has the goal of tax cuts, job creation, and infrastructure projects.

At any rate, some may wonder how a program that needs to stay open to aid the financial system can simultaneously allocate its coffers to other unrelated projects.

I'll let you in on a secret: TARP no longer has anything to do with the financial system. It hasn't in a while. The biggest irony of TARP -- which was born a bank bailout, ridiculed as a bank bailout, and will be always known as a bank bailout -- is that banks will likely end up a minority recipient of its funds.

Out of the $700 billion originally allotted, only $245 billion was invested in banks. With B of A now fully repaid and Citi and Wells on its heels, every major bank will likely repay TARP in just over one year. Several smaller banks failed, taking their TARP investments with them, but profits from other banks more than offset their losses. The Treasury now expects it'll reap an aggregate $19 billion profit on its investments in banks.

That's where the good news ends.

What started as a plan to plug the financial panic quickly became a grab-bag-o'-fun for anyone in need. Insurance companies. Auto companies. Auto lending companies. Homeowners. The city of San Jose even tried to get in on the action. If you needed money, TARP had a lot of it. A maddening irony of Michael Moore's documentary Capitalism: A Love Story, was that he (rightly) criticized banks for their TARP indulgences while forgetting that General Motors, portrayed in the film as the ignored bastard child of America, received more TARP money than any bank. The $50 billion GM received is more than Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and American Express (NYSE:AXP) received combined -- and all those banks repaid the amount in full, something GM can only dream about.

The beginning of the end
TARP started with an absurdly high figure, $700 billion, but passed largely on the grounds that much, if not all, of it would be recovered. That way, its long-term fiscal impact wouldn't be cruel. Many said this was hooey, but we now know it's true: Had TARP stuck to its original purpose, it would have achieved both goals of halting the financial panic and quickly repaying taxpayers in full plus interest with flying colors.

The original legislation actually had a well-thought-out mechanism to ensure this. The first House bill included an amendment giving authority to bill the financial industry for every penny not recouped within five years. The admirable purpose of this, the bill said, was to "ensure the [bailout] does not add to the budget deficit or the national debt."

Good luck with that. Now that TARP has spread its love thick throughout the economy, the odds that it won't wreak havoc on public finances are exactly zero. A prime example of bailouts gone astray.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. American Express is a Motley Fool Inside Value selection. The Fool has a disclosure policy.