Did We Really Waste $78 Billion on TARP?

According to a Congressional oversight panel, the TARP program "wasted" $78 billion by overpaying for assets. It makes a good story -- AP can report it as the Bush administration overpaying Wall Street, while Fox can use it as proof that the government doesn't know what they're doing. Perfectly suited for both outlets. But is it true?

That's a little less clear.

Let's remember the original purpose of the Troubled Asset Relief Program. The problem, as I discussed back in October, is primarily that underneath all the covers, hedges, credit default swaps, and securitized mortgage portfolios, there are a whole lot of mortgages on a whole lot of properties that no one knows quite how to value. They can be certain the assets are worth something -- but it might be 25 percent or it might be 95 percent of the book value.

If you don't know how to value an asset, you have to look at the price you could sell it at now. That price is driven down by perceived risk. I haven't seen a real fire sale in years, but this is where the term "fire sale" came from: after a fire, a company needed to sell off inventory, and some of it might be smoky or water-damaged, so they sold it at a low price to get it out. Forced sales push the price down.

Right now, panic -- and President Obama's talk of impending "catastrophe" isn't helping -- is making everyone perceive really big risks, while companies that are selling these assets are pricing them at fire sale prices to get them to move. There are mathematical means of turning your subjective evaluations into a price you're willing to pay, but in this situation, it's always going to mean prices will end up at the lower end of the range.