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Happy Birthday, TARP: Thanks for (still) bailing us out

October 3, 2012: 3:07 PM ET

Four years later, bailouts have become more and more part of our financial system.

Former Treasury Secretary Hank Paulson asked Congress to approve the TARP bailout fund.

FORTUNE -- Topeka is not normally a place you associate with Too Big to Fail and bank bailouts. But this past June, the inspector general for the Federal Housing Finance Agency made an odd discovery. Starting in late 2010, the Federal Home Loan Bank of Topeka, a regional government-backed lender, had begun funneling more and more of its cash into troubled banks. In all, FHLB Topeka had laid out more than $5 billion in unsecured loans.

And it wasn't alone, in the early months of 2011, long after the financial crisis was over, around the country the federal home loan banks were taking on more risk, handing out an increasingly amount of assistance to financial firms. Even more odd, much of this money wasn't even going for U.S. lending. A good deal of the money was being used to help prop up foreign banks.

October 3 is TARP's birthday. Four years ago, Congress voted, after shooting down the plan just days before, to use as much as $700 billion to rescue the nation's largest banks, Wall Street and presumably our economy. It became known as the Troubled Asset Relief Program, and was originally designed to buy up delinquent mortgages and other so-called toxic assets. In the end, the program sent the bulk of the cash it did shell out, just under $500 billion, directly to banks, car companies and insurance companies, most notably AIG, in order to keep them afloat. Only a small portion of the money was ever used to help borrowers stay in their homes or to purchase troubled loans directly.

MORE: Sheila Bair and the bailout bank titans

By one measure, though, it worked. The economy didn't collapse into a depression. We still have banks, and are not forced to hide our gold in empty cereal boxes, though some truly bearish hedge fund managers think we should. But that's a smurfity low bar.

More recently, the Treasury Department and other defenders of the bailout have turned to profits to argue their case. And they recently got another talking point when the government was able to unload the bulk of its remaining stake in AIG for a gain. They say the bailouts have made sense, in part, because they made money. Most of the money we gave to the banks came back with interest.

Never mind the fact that the Treasury Department has recently been unloading stakes in small banks at a loss, and the fact that our investment in General Motors is still deeply underwater. Does that mean that the GM bailout, and the tens of thousands of jobs it likely saved, was a flop? It's not really clear to me that profits should be our measuring stick. The real measure should be whether we end up with a safer, fairer financial system. Did we?

But what is clear is that four years after TARP was born, the banks are still very much on the receiving end of government cash and support. Of course, the government has always played a backstop role in making sure banks, and our housing market, functioned. But ever since TARP, the financial assistance we provide has become more common and straight forward.

MORE: Surprise! The big bad bailout is paying off

That may make sense. Front door bailouts are easier to keep track of. And when the banks are getting regular assistance it's easier to make a case for stronger regulations. What's more, when at least some of the government's money is at stake, we all seem to pay more attention and get a better handle of just what banks are doing with their money, at least as much as we can understand the workings of modern finance.

But in a year in which the nation's largest banks are on pace to make $60 billion dollars in profits, you have to wonder just how much of this assistance is needed.

First of all, there's TARP, which, despite being envisioned as a temporary program, is still very much around. While the nation's biggest banks have paid back the government plus interest, hundreds of small banks, as of June 30, had yet to pay back the $14 billion in cheap loans that were provided to them by the government. And it's not just that TARP hasn't been wound down. It's still active. TARP's housing assistance program, a worthy endeavour to be sure, is still authorized to spend $40 billion, money that should have been spent long ago, if at all.

But even beyond TARP, a number of government agencies have been reluctant to pull the plug on some payouts and programs that were established to help the banks at the height of the financial crisis. One of the biggest direct handouts comes from the Federal Reserve.

MORE: Countrywide: It's baaack

During the financial crisis, the Federal Reserve, for the first time in its history, began paying banks interest, 0.25%, on the money they keep on deposit at the U.S. central bank. It was a way to bolster the Fed's balance sheet and funnel some extra cash to the banks at the same time. Money poured into these Fed accounts. These days it's become a way for banks to make money for doing nothing. Banks now have just over $1.5 trillion on deposit at the U.S. central bank, which means they collect about $4 billion a year from the federal government in interest payments.

As the economy improved you would have expected the banks to redeploy that cash, and hopefully use it to make more loans. But banks have been reluctant to abandon this risk-free source of income from the government. Some people think it's time for Ben Bernanke and the Fed to cut the banks off. The Bank of England recent stopped paying interest on its deposits. And some central banks around the world are even now charging banks that keep their cash on the sidelines.

Another hand out comes from the Federal Deposit Insurance Corporation. During the financial crisis, the FDIC agreed to insure all non-interest bearing transaction accounts. As a result, corporations, in search of safety, have stashed more and more cash at banks. It now totals over well $1 trillion. At the same time, that's given banks access to a growing hoard of capital that is far cheaper than it should be.

The unlimited insurance is set to expire at the end of this year. But banks have argued that it needs to stay in place. There seems to be a pretty good chance it will. And probably won't be alone.

So happy birthday, TARP. In some form or another, you will likely live to see many more.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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