Two and a half years ago, Wall Street faced death's door -- and deservedly so. It created its own mess.

The U.S. faced a stark choice. Would we let the financial system implode, possibly taking everyone else down with it, or endorse a word that became the mark of public ire: bailout?

We chose the latter, with a bailout known as TARP -- the Troubled Asset Relief Program.

Most Fools never agreed with TARP. Even those who supported it were disgusted with the plan. Nothing good came from it. The best that can be said is that we avoided an even more miserable experience than we endured.

But like it or not, it happened. We bailed out our economy. The question now: How'd it go?

On Wednesday, the Congressional Oversight Panel, the organization tasked with watching over TARP, released its final report on the program.

Let's start with the scorecard. Of the $700 billion allocated to TARP, only a fraction was ever spent. Most has been, or very likely will be, repaid. The Congressional Budget Office now estimates TARP's final cost to taxpayers will be $25 billion. "An enormous sum, but vastly less than the $356 billion that CBO initially estimated," the report notes.

TARP has doled out $419 billion to date, $256 billion of which has been repaid. Contrary to popular belief, not all of these outlays went to banks. Here's how the numbers work out:


Amount Spent

Amount Repaid So Far

Banks $250 billion $216 billion
Auto industry $81.7 billion $29.5 billion
AIG $69.8 billion $9.1 billion
PPIP (credit market assistance) $15.9 billion $700 million
Homeowners assistance $1 billion --
Community development $570 million --
Small-business loans $368 million --
TALF (more credit market stuff) $100 million --
Other housing measures $200 million --
Total: $419 billion $256 billion

Source: Treasury, COP.

Taxpayers' position is realistically better than this shows, since the Treasury owns massive chunks of General Motors (NYSE: GM) and AIG (NYSE: AIG) common stock that it hasn't yet sold. How much it can fetch for these shares remains to be seen -- as does the time it will take to shed these stakes. (TARP, it's important to note, wasn't the only bailout, but it was the largest taxpayer-funded program, and the most visible in the public eye).

We had a chance to speak with former Sen. Ted Kaufman (D-Del.), chairman of the COP, about TARP's existence on Wednesday. Below is an edited and condensed transcript of our conversation.

What is the biggest misconception that the public holds about TARP?
That we lost all the money. The Congressional Budget Office estimates we'll lose $25 billion. The vast majority of the money will be returned to taxpayers.

Has the problem of "too big to fail" been solved?
No. When you do something like the TARP, you create a moral hazard, because institutions believe they're too big to fail. And other organizations think they're too big to fail, like the ratings agencies who now give higher ratings to big banks than they do to small banks, and that gives them a competitive advantage.

What needs to be changed to prevent the next financial collapse and bailout?
I think most of it's in the Dodd-Frank legislation. We still have to wait and see what the regulators actually do, because, as you know, most of the decisions have to be made by the regulators.

Very aggressive oversight by all regulators, and especially by Congress, would be a good way to prevent something like this from ever happening again.

What would Congress have done differently with TARP with the benefit of hindsight?
The Congressional Oversight Panel oversees how Treasury implemented the TARP, not whether Congress should have done the TARP or not.

That being said, when you look at where the country was at that time, we were on the edge of a deep, deep hole. We could have destroyed the financial system of the United States and of the world. You have to give some of the credit for survival to TARP, the Federal Reserve, the FDIC, and the stimulus act. All those things brought us back from the precipice. But the basic act of TARP creates a problem of moral hazard.

What worked the best, and what was the biggest failure?
By far, the best was that we avoided a financial crisis and second depression. Second best was that it's going to cost, according to the CBO, $25 billion as opposed to the $700 billion we started with.

The first big minus is the problem of moral hazard inherent to TARP, which Treasury I think exacerbated. People believe that they are too big to fail, so they take risks because they get a higher return, whereas they don't need to be concerned about what happens if they fail. Ratings agencies give better ratings to the big banks than to the small banks, which is a competitive advantage for them. And we've expanded the concept of "too big to fail" beyond banks to include automobile companies, automobile finance companies, and AIG.

The second big problem is that Wall Street clearly came out a lot better than Main Street did. The foreclosure modification program has done very little. None of the big Wall Street center banks went down, but over 300 now small- and medium-sized banks failed. Meanwhile Wall Street came out really, really well.

Why did TARP's homeowners programs never get off the ground?
I don't think there was an emphasis on it. Securitization presents incredible conflicts of interest. Servicers want to foreclose because they make more money. Fannie Mae and Freddie Mac said they aren't going to police robo-signing because they have so many other things they're dealing with the servicers on.

I really like your article about what was supposed to happen with the Notes and what actually happened with them. Clearly, nobody looked into how securitization would affect modifications in the real world. And what started as a subprime problem became a prime problem because when people are unemployed they can't make the payments.

What are you most concerned about?
Personally, I'm very concerned about the fact that we haven't done a lot about capital requirements.

Second, I think there's going to be a number of reports coming out shortly that point out in detail how difficult it would be to resolve gigantic failing banks with investments all around the world.

Third, the assets of the six largest banks [Bank of America (NYSE: BAC), JPMorgan (NYSE: JPM), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), Morgan Stanley (MS)] are 62% of GDP, up from 17% 15 years ago.

Finally, the House of Representatives' effort to cut funding for the SEC, I mean, is just counterproductive when the biggest reason for our deficits is because we didn't have proper oversight. If you live in Washington, you get to love ironies.

What are your thoughts on regulators leaving to work in the private sector, and vice versa?
The revolving door is an extraordinary threat to the future of our system. They're not bad people, but you're creating incredible conflicts of interest, so we need to take a detailed look at how to fix the conflict-of-interest rules.

If necessary, would having another TARP in the future be politically feasible?
Right now? Oh my God, absolutely, positively not. You couldn't get the first vote for it in Congress right now.

But this is a lesson of life for me: It's very difficult to make decisions when you're under incredible stress and incredible consequences. It's hard for us to go back and say what it was like to be like to be in that room when George W. Bush, a raging free-market guy, decided that TARP was the answer.

So we should be doing things now, with that fact in mind, to prevent another TARP, because otherwise decisions are going to be made in split seconds, and you're not going to be able to fine-tune them.

At some future date if we have some incredible financial crisis and the only answer is to have a TARP, yeah I think that's going to happen. The markets basically believe that.

As we see what's happening in Japan, you can have a series of circumstances that no one ever figures on that can bring you to a financial crisis.

We should be doing everything we can now to prevent the possibility of ever having to have another TARP program.

What do you think about TARP? Drop us a line in the comment section below. Pitchforks welcomed and encouraged.

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Morgan Housel owns preferred shares of Bank of America. Ilan Moscovitz doesn't own shares of any company mentioned. General Motors is a Motley Fool Inside Value selection. The Fool owns shares of Bank of America and JPMorgan Chase. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.