Troubled Asset Relief Program (TARP)

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The Emergency Economic Stabilization Act of 2008 is legislation that established the Troubled Asset Relief Program (TARP) to grant the Secretary of the U.S. Treasury up to $700 billion to buy distressed assets owned by financial institutions. This was done to allow the Treasury to limit executive compensation and "golden parachutes" at those institutions, and to establish an oversight board to monitor the Treasury. In doing so, it was hoped the act would restore confidence in the credit markets by buying bad assets and reducing uncertainty about the worth of the remaining assets.

The act originated as a three-page proposal by Treasury Secretary Henry Paulson and grew to 451 pages after House and Senate negotiations. The original proposal was rejected by the House on Sept. 29 of 2008 by a margin of 228 to 205. It was approved by the House and Senate after a major overhaul that included a great many earmarks for legislators' various constituencies. (For example, it includes an excise tax exemption for wooden arrow manufacturers.)[1]

Neel Kashkari, an assistant Treasury secretary for international economics and a former executive at Goldman Sachs, was appointed as the program's supervisor.[2]

The act was commonly referred to as a "bailout" of the U.S. financial system. It was proposed by President George W. Bush and Treasury Secretary Henry Paulson during the liquidity crisis (or "credit crunch") in the autumn of 2008. Proponents of the bill argued that it was necessary to prevent a system wide breakdown of the U.S. economy.

The original plan would have granted the Secretary of the Treasury unprecedented power to spend the $700 billion without being subject to congressional or judicial review. Section 8 of the Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." This provision was not included in the final version.

The revised plan set aside $250 billion of the rescue program to inject capital into banks in exchange for an equity stake for the U.S. Treasury Department.[3]

This would have allowed the Treasury to purchase bad debt (mostly mortgages and mortgage-backed securities) through an auction process as well as by busing the loans directly. It would also allow companies to participate in an insurance program in which the Treasury would guarantee troubled assets, charging companies a premium "sufficient to cover anticipated claims," according to the bill.[4]

However, in a surprise turnaround on Nov. 12, 2008, Paulson said that the remaining funds in the $700 billion TARP program would be best used to provide capital to distressed companies and tackle consumer debt, rather than buy illiquid mortgage-related assets. (The Treasury had already spent $250 billion on bank recapitalisations.) [5] Under the program, the banks will be allowed to determine how best to use that capital.

Since then, Treasury has allocated $250 billion to buy non-voting preferred shares of banks paying a 5 percent annual dividend, as well as warrants convertible into equity. The investments range from $25 billion each in JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. in San Francisco to $1.6 million in California-based Saigon National Bank.

Also, $40 billion went to American International Group Inc. and another $20 billion to Citigroup, along with a $5 billion guarantee against possible losses. $20 billion went to purchase consumer and small-business loans, and $13.4 billion went to automakers General Motors Corp. and Chrysler LLC. In addition, $5 billion of TARP funds will be used to purchase preferred shares and warrants in GMAC LLC, the automaker’s financing arm, with Treasury separately lending another $1 billion to GM to support GMAC’s transition into a bank holding company.[6]

The Capital Purchase Program (CPP) of the Troubled Asset Relief Program closed on Nov. 14 to all public companies wishing to apply for the government bailout.[7]

Congress approved the second $350 billion tranche of the TARP program in January of 2009. In February 2009, Treasury Secretary Timothy Geithner unveiled a "Financial Stability Plan" to shore up the banks and help the credit markets function again. His plan called for using the second $350 from TARP along with money from other government agencies such as the Federal Reserve and from the private sector.[8] The Obama administration plans to rename the Troubled Asset Relief Program, referring to it as the Financial Stability Plan instead.

In mid-2009, the program was projected to lose as much as $341 billion. By early 2011 that was reduced to $25 billion, partly because of the controversial decision to pump much of the TARP money into banks instead of launching a large-scale purchase of securities backed by toxic subprime mortgages.[9]

Developments

  • June 2009 - The Treasury let 10 financial companies repay a combined total of $68 billion in loans they had received under the Troubled Asset Relief Program. The 10 included JPMorgan Chase, Goldman Sachs, Morgan Stanley and American Express.[10]


References

  1. Weekly Review. Harper's Magazine.
  2. Credit Crisis Bailout Plan. New York Times.
  3. Pelosi, Reid Ask Paulson to Toughen Limits on Pay. Bloomberg.
  4. Bailout Bill Unveiled. Marketwatch.
  5. "More Rabbits From the Hat". The Economist.
  6. Banks’ ‘Catatonic Fear’ Means Consumers Don’t Get TARP Relief. Bloomberg.
  7. Who Hasn't Gotten a Bailout?. Morningstar.com.
  8. Geithner Announces Restructured Bailout Plan. The Washington Post.
  9. Bailouts are shaping up to be cheaper than expected. Chicago Tribune.
  10. Repaying TARP money: Hauled to safety. The Economist.
  11. Geithner Announces Stricter Lobbying Rules for Bailout. The Wall Street Journal.
  12. Mending the TARP. The New York Times.