Budgetary Costs

CBO report makes the point that the budgetary cost of spending $X from the TARP fund on its original finance-related targets is less than the budgetary cost of spending $X on car companies, but the magnitude is unclear:

Consistent with the budgetary treatment of financial assets purchased under the TARP, the federal budget would record the cost of such loans using procedures similar to those specified in the Federal Credit Reform Act, with an adjustment to account for market risk. On that basis, CBO estimates that the expected cost of the proposed loans would be roughly 70 percent of the aggregate face value—or about $17.5 billion. That estimate takes into account the current financial condition of firms that would qualify for loans—as demonstrated, for example, by current market interest rates on outstanding
debt—and reflects historical data on defaults and subsequent amounts recovered. Under the legislation, the loans would have a maturity of 10 years
or longer, as determined by the Secretary of the Treasury, and would carry an interest rate of 5 percent for the first five years after disbursement and
9 percent for remaining years.

In view of the recent deterioration in the financial condition of the automobile industry, CBO expects that the net budget cost of loans to auto manufacturers
and suppliers would probably be higher than the cost of alternative uses of the TARP funds, which would likely involve firms whose credit risks are lower
than those of the automobile industry. As a result, CBO anticipates that requiring the Secretary to devote $25 billion of TARP authority to the
proposed loans for the automobile industry would likely result in a net increase in the federal deficit compared to current law. Because of continuing uncertainty surrounding the implementation of the TARP under current law, however, CBO cannot provide a specific estimate at this time of this legislation’s incremental impact on the federal budget.

Something to think about. The credit crunch is tending to obscure the issue of the extent to which the Detroit firms would or would not be creditworthy even absent a crunch. The CBO is saying here that their less creditworthy than the financial sector.