Photo: Tax Credits
The Troubled Asset Relief Program, commonly referred to as TARP, is a fundamental component of the Emergency Economic Stabilization Act of 2008 signed into law by President George W. Bush on October 3, 2008.
The overall goal of the Act is to restore liquidity and stability to the financial system of the United States. The TARP gives the US Government the ability to purchase $700 billion in assets and equity from financial institutions to strengthen the financial sector.
The TARP was the largest component of the government’s measures to address the subprime mortgage crisis, facilitate the unfreezing of the credit markets, and prevent an implosion of the financial system.
By purchasing troubled assets using secondary market mechanisms, it was the government’s hope that liquidity in the financial system would improve and troubled financial institutions would be able to repair their balance sheets.
Under TARP, the Secretary of the Treasury, Timothy Geithner, has the authority to take the necessary action to purchase troubled assets from any financial institution. Troubled assets have been defined to mean the following:
- Residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages that in each case were originated or issued on or before March 14, 2008.
- Any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
Although the Secretary has discretion as to which assets are “troubled,” he must consider several factors in his decision including: protecting the interests of taxpayers, providing stability to the financial markets, preserving home ownership, the long-term viability of the financial institution, and ensuring participation of all financial institutions regardless of size or other characteristics.
TARP was set to expire on December 31, 2009 but was extended until October 3, 2010. Shortly after TARP was passed into law, the program was revised such that Treasury could buy senior preferred stock and warrants in the nine largest American banks provided that these banking institutions met certain criteria, most of which involved executive compensation parameters.
Later, President Bush declared that TARP funds could be spent on any program that he deemed personally necessary to avert the financial crisis. This provision enabled the TARP to use funds to support the auto industry including companies like General Motors.
Since TARP was created, the program has made loans and purchased preferred shares and equity warrants of financial institutions as well as smaller regional banks, purchased preferred shares of AIG, and made loans to automakers and their respective financing arms.
The TARP program has also supported the Making Homes Affordable Program. It generally does this by refinancing mortgages held by Fannie Mae or Freddie Mac.
Originally expected to cost the U.S. Government hundreds of billions of dollars, the White House stated on September 10, 2010 that the cost of the “financial bailout,” is now expected to be less than $50 billion.
However, many critics claim that TARP will end up costing much more due to the fact that the government implemented other more costly bailouts which are not being included in these calculations. For instance, the government’s bailout of Fannie Mae and Freddie Mac, which cost approximately $145 billion, are technically not considered part of the TARP program.
According to Pro Republica, a non-profit newsroom that produces investigative journalism in the public interest, to date 884 companies were recipients of TARP funding (including Fannie Mae and Freddie Mac), with total committed capital slightly over $600 billion.
Total disbursed capital is $547 billion and the total returned is approximately $201 billion. These commitments capture both the debt and equity portions of the investments (for example, General Motors has paid back $8.4 billion in debt but has not returned $40 billion in equity).
On the eve of TARPs expiration, the Congressional Oversight Panel, which was tasked to review the state of financial markets and the regulatory system after TARP was created, released a report evaluating the program’s overall effectiveness.
According to this report, although the TARP “provided critical support to the financial markets at a time when market confidence was in free-fall, the program has been far less effective in meeting its other statutory goals, such as supporting home values, retirement savings, and economic growth.” In particular, the Panel reported that since October of 2008, 7.1 million homeowners have received foreclosure notices, home prices have dropped 28 percent since their peak, and stock indices have fallen 30%.
Perhaps it will take some time to determine if TARP was a successful program as companies begin to repay their loans and the government begins to realize the upside potential of its equity investments; however today, economic weakness persists and Americans continue to lose their homes. So far, not so good.
Published or updated April 5, 2013.