Geithner defends TARP

NEW YORK (CNNMoney.com) -- Treasury Secretary Tim Geithner defended the government's bailout of the financial system on Tuesday, saying it has been a "critical" part of the economic recovery and will ultimately cost less than expected.

Geithner is testifying before the Congressional Oversight Panel, the main watchdog for the Troubled Asset Relief Program, or TARP. The government enacted TARP in 2008 at the height of the financial crisis. The program is due to expire in October.

While the economy remains challenged, Geithner said TARP and other "extraordinary actions" taken to combat the financial meltdown "have helped stabilize the financial system and restore economic growth."

Geithner acknowledged that some of the government's efforts were "unpopular." The program, initially funded at $700 billion, was used to pour billions of tax dollars in to troubled Wall Street banks, insurance giant American International Group and the auto industry.

But he argued that such steps were "essential" to contain the crisis and that they have improved conditions for homeowners, consumers, businesses, and state and local governments.

Geithner said that the final cost of the program is expected to be significantly less than originally anticipated. In August 2009, the Treasury projected that TARP would increase federal deficits by $341 billion. As of Tuesday, the program is expected to cost $105 billion, Geithner said.

The Congressional Budget Office estimated in March that TARP's overall cost will be $109 billion.

TARP investments have generated $24 billion in gains for taxpayers, and more than half of total disbursements under the program has been recovered, according to Geithner.

He said the government's investment in GMAC, the financing arm of General Motors, will result in a smaller-than-expected loss. GMAC, which changed its name to Ally Financial Inc. earlier this year, received over $16 billion in TARP funds.

The bailout of AIG (AIG, Fortune 500), the giant insurance company, will still end in "some loss," he said. The government has pumped roughly $180 billion into AIG and the company is trying to sell off assets to repay some of the debt.

"The government is still exposed to substantial risk in AIG," said Geithner, adding that the potential losses have come down "dramatically" from previous levels.

Elizabeth Warren, the panel's chair, said the dozens of programs introduced to combat the financial crisis "have had an important impact." But she raised questions about a number of issues that still threaten the financial system.

Warren said thousands of US banks are "dangerously exposed" to losses in the commercial real estate market. She also said many banks have not yet digested the "toxic assets" that nearly brought down the housing market, and that lingering problems in the banking system are hindering lending to small business.

In addition, the Treasury's efforts to prevent foreclosures are not working, she said.